- Moody's maintains stable outlook on India's banking system citing strong growth and capital buffers
- Loan growth expected to rise to 11-13% in FY27 with stable asset quality and low NPL ratio
- Net interest margins to improve gradually, boosting return on assets to 1.2-1.3% in FY27
Moody's Ratings has maintained a stable outlook on India's banking system, citing strong economic growth, resilient asset quality and robust capital buffers that should help lenders navigate emerging pockets of stress. Moody's expects India's operating environment for banks to remain favourable over the next 12-18 months, supported by policy stability and domestic demand.
The ratings agency forecasts real GDP growth of 6.4% in FY27, the fastest among G-20 economies, providing a solid backdrop for credit growth and balance-sheet expansion.
Credit Growth To Pick Up
System-wide loan growth is expected to accelerate modestly to 11-13% in FY27, from 10.6% in FY26 year-to-date, aided by consumption-led growth and policy support. While some stress is anticipated among micro, small and medium enterprises (MSMEs)-particularly in export-oriented sectors such as textiles and gems and jewellery-Moody's believes banks have built sufficient loan-loss reserves to absorb potential shocks.
The agency expects the non-performing loan (NPL) ratio to remain low at 2-2.5%, even as slippages rise modestly as loans season. Retail asset quality is seen as stable, especially in the prime borrower segment, while corporate loan quality is expected to remain healthy, supported by stronger balance sheets and improved profitability among large companies.
Profitability Seen Improving Gradually
Moody's expects net interest margins (NIMs) to widen gradually as deposit costs ease with a lag following earlier policy rate cuts, while lending rates remain relatively stable. The Reserve Bank of India had cut policy rates by a cumulative 125 basis points in 2025, taking the benchmark rate to 5.25%, with any further easing expected to be modest.
As a result, system-wide return on assets (RoA) is projected to rise to 1.2-1.3% in FY27, broadly stable but supported by improving margins and growing fee income from wealth management and insurance. While loan-loss provisioning costs are expected to normalise from cyclical lows, banks are also likely to begin building buffers ahead of the transition to expected credit loss norms under IFRS 9.
Capital Buffers Remain Strong
Capitalisation across the banking system is expected to remain robust, backed by strong internal capital generation and previous equity raises. Moody's notes that banks' capital ratios already sit well above regulatory requirements, limiting the need for fresh capital despite steady asset growth.
The phased adoption of IFRS 9 from April 2027 and the transition to final Basel III norms could lead to a 50-75 basis point reduction in capital ratios over time. However, Moody's expects the overall impact to be broadly neutral, with lower risk weights on MSME and home loans offsetting higher charges on unsecured lending and capital market exposures.
Key Pillars: Funding, Government Support
Funding and liquidity conditions are expected to stay stable, with loan growth broadly tracking deposit growth and the system-wide loan-to-deposit ratio holding near 80%. While competition for deposits remains intense, regulatory liquidity buffers and reliance on core deposits provide comfort.
Moody's also reiterated its expectation of strong government support, particularly for public sector banks, underscoring the stability of India's banking system amid a still-evolving global risk environment.
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