indian-banks-set-for-12-14-pc-loan-growth-in-fy26

Indian banks are projected to experience loan growth of 12-14 per cent in the financial year 2025-26 (FY26), driven by increasing deposit inflows and improving liquidity conditions, according to a report by Ambit Capital Research.

 

The report highlights that the banking sector is witnessing a gradual recovery from liquidity constraints, which had earlier posed challenges to credit expansion.

 

The research suggests that loan-to-deposit ratios (LDRs) have started to improve as banks benefit from a steady rise in deposits and a slower pace of loan disbursements. This trend is expected to reflect in the period-end LDR as well, supporting a more balanced credit environment.

 

Additionally, easing liquidity conditions and a potential reduction in risk weights on unsecured retail loans could provide further stability to loan growth in the coming months.

 

Despite this positive outlook, the report cautions that banks are likely to face pressure on their net interest margins (NIMs) due to rising deposit costs and declining lending yields. It estimates that NIMs for most lenders could shrink by 5-20 basis points in FY26.

 

However, the extent of the impact will vary depending on a bank’s loan portfolio and liability structure. 

 

Banks with a higher share of fixed-rate loans are expected to manage their margins better than those with a greater proportion of variable-rate loans.

 

The report also highlights a growing concern over rising non-performing assets (NPAs) in the retail sector, primarily due to the increasing volume of unsecured retail loans, such as personal loans and credit card borrowings.

 

While asset quality had remained strong following the COVID-19 pandemic, the surge in unsecured lending has led to a higher rate of defaults in recent years.

 

To mitigate this risk, banks have begun consolidating their retail loan portfolios, enabling them to monitor and manage balance sheet stress more effectively. This process is expected to yield results by the first half of FY26, helping lenders stabilise their asset quality.

 

Although credit costs are anticipated to rise in the coming year, banks have built strong provisions ranging from 0.7-1.7 per cent of total loans, ensuring a degree of financial resilience. The provision coverage ratio (PCR) remains at around 70 per cent, offering a cushion against potential defaults.