Banking Sector Loan Growth to Remain at 12–14% in FY26 Amid Liquidity Easing: Ambit Capital

Despite moderation in loan growth and rising credit stress, stable asset buffers and easing retail lending norms could support banks through FY2026.

New Delhi, March 30: The Indian banking sector is likely to maintain a steady loan growth rate of 12–14% in FY2026, driven by easing liquidity conditions and expected moderation in risk weights on unsecured retail loans, according to a new report by Ambit Capital.

“With easing liquidity and probable easing of risk weights on unsecured retail, we expect sector loan growth to stay at 12-14% in FY26E,” the report stated.

Loan growth had slowed to 12% in February 2025, marking the eighth consecutive month of moderation, compared to 16.6% in the same period last year, according to Reserve Bank of India (RBI) data.

---

Margins Under Pressure, But Some Banks Better Placed

Despite solid loan growth projections, net interest margins (NIMs) could remain under pressure due to high deposit pricing and softening yields, with a potential decline of 5–20 basis points (bps) across lenders.

Banks with a higher share of fixed-rate loans are likely to fare better on margins, compared to those heavily exposed to variable-rate portfolios.

---

Retail NPAs and Credit Costs May Rise

Post-COVID, banks witnessed an impressive trend in asset quality. However, the recent surge in unsecured personal loans and credit card debt has triggered a spike in retail non-performing assets (NPAs).

Ambit anticipates that recent consolidation in retail lending will help banks identify and manage balance sheet stress by the first half of FY26. As a result, credit costs may rise, but banks are well-equipped with:

• Provision Coverage Ratio (PCR) of around 70%
• Buffer provisions ranging from 0.7% to 1.7% of total loans

These buffers are expected to offer a cushion against emerging risks.

---

Deposit Mobilization a Growing Concern

The report flags deposit mobilisation as a growing challenge, citing high competition and shifting saver preferences. Fixed deposits have been losing favour, especially in urban areas where savers now prefer higher-yield investment avenues.

Even in rural and semi-urban regions, tech-driven capital market platforms are attracting retail money, making it difficult for traditional banks to grow their deposit base effectively.

“Despite size, reach, or digital sophistication, deposit augmentation has become a concern for all lenders,” the report noted.

---

As India’s financial ecosystem grows more competitive and diverse, banks will have to balance loan growth, asset quality, and deposit traction to maintain long-term resilience.