Indian Banks To See Steady Performance In FY26 Amid Margins, Credit Cost Pressures: Fitch
Despite slowest sector loan growth in four years, the sector has reported improved asset quality, stronger capital buffers and stable profitability.
Strong financial performances of Indian banks for the financial year ended March 31, 2025 has underpinned the standalone credit profiles of rated banks and positions the sector for future growth, Fitch Ratings said in a press release.
Despite slowest sector loan growth in four years, the sector has reported improved asset quality, stronger capital buffers and stable profitability. This has led Fitch Ratings to believe that banks can sustain steady performance across most credit metrics in FY26, except for earnings due to cyclical pressures on margins and credit costs.
"We expect sector loan growth to rebound to 12–13% in FY26 on accommodative monetary policy and easing funding conditions," the rating agency said.
However, improved deposit mobilisation will be needed to preserve banks' loan-to-deposit ratio, which improved by nearly 120 basis points in FY25.
State-owned banks' loan growth of 12.4% was faster than private players in FY25 for the first time in nearly a decade. Fitch expects this dynamic to continue for at least another year, while private sector banks manage asset quality pressures in their unsecured portfolios and elevated LDRs.
"We believe the impaired-loan ratios and credit costs for most banks have bottomed. Some banks may still improve given scope for write-offs in legacy bad loans that will further reduce the bad loan stock. This and higher loan growth could reduce the sector’s impaired-loan ratio by 20bp in FY26," it said.
In FY25, banking sector's impaired-loan ratio fell by about 60 bps to 2.2% in FY25, as bad loans fell by 12%. Although write-offs and recoveries were lower than in previous years, due to a shrinking stock of legacy bad loans, they remained sufficient to largely offset bad loan additions.
A renewed focus on secured loans and reducing stress in unsecured segments, helped by easing interest rates and financing conditions, should limit risks of any sharp near-term rise in new bad loans.
Further, banks' ability to manage risks remains critical to controlling credit costs over the medium term, given historically elevated credit risk in corporate lending.
We expect steady performance to continue, though sustaining sound core financial metrics that strengthen loss-absorption buffers and resilience to economic shocks relative to the previous cycle would support positive momentum for rated banks’ standalone credit profiles.
