New Delhi [India]: The loan growth in India’s banking sector is expected to remain in the 12-14% range for the Fiscal Year 2026 (FY26), according to a report by Ambit Capital.
The report attributes this projection to easing liquidity conditions and a potential reduction in risk weights on unsecured retail loans.
“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 Trends & Challenges
Bank loan growth, which measures the total outstanding loans issued to consumers and businesses, has been moderating in recent months.
- February 2024 marked the eighth consecutive month of slowdown, with loan growth at 12%, compared to 16.6% in February 2023, as per RBI data.
- High deposit pricing and softening yields will likely keep lenders’ margins under pressure (5-20 basis points) in FY26.
- Banks with higher fixed-rate loan portfolios are expected to have better margins compared to those relying on variable-rate loans.
Retail Lending, NPAs & Credit Costs
The report also noted a spike in retail Non-Performing Assets (NPAs) due to the rapid expansion of unsecured loans, such as personal loans and credit cards, over recent years.
- The ongoing consolidation in retail lending is expected to help banks identify balance sheet stress by H1FY26.
- Credit costs may increase year-on-year (YoY) in FY26, but the sector is well-positioned due to:
- 70% Provision Coverage Ratio (PCR)
- Buffer provisions of 0.7-1.7% of total loans
Deposit Growth: A Key Challenge
The report highlights that deposit augmentation has become a major challenge for all lenders, regardless of balance sheet size, geographic presence, or technological advancements.
- The rising cost of deposits has led banks to invest in higher-yielding retail assets to compensate for shrinking margins.
- Indian households now have more diverse savings options, leading to a gradual decline in fixed deposit shares.
- Urban savers prefer higher-yield investment options, while technology-driven financial players are gaining ground in rural and semi-urban areas.
Given these shifts, maintaining deposit growth momentum will remain a key challenge for most lenders in FY26.