India’s Banking Sector Set For Stronger H2 FY26 Performance Amid Better Macros, Stable Margins: Report

Mumbai, Nov 27: The Indian banking industry is poised for a stronger performance in the second half of FY26, supported by improving macroeconomic conditions, easing funding costs, benign asset quality and early signs of a consumption rebound. Banks anticipate a stable credit growth and margins, and sustained asset quality, reinforcing confidence in the sector’s resilience, according to a report on Thursday.

Credit Growth Projected at 11.5–12.5% in FY26

Banking credit is expected to grow at 11.5–12.5 per cent year-on-year in FY26, driven by retail and MSME segments, with corporate lending showing some momentum as borrowers shift from bond markets to banks, which remains concomitant with the yield differentials. Deposit growth continues to lag loan growth, keeping the Credit-to-Deposit ratio elevated at approximately 80 per cent, the report states.

Net Interest Margins Likely to Stabilise

Meanwhile, Net Interest Margins (NIMs) are expected to stabilise in the second half of the current financial year as banks focus on core earnings and operational efficiency. At the same time, funding costs are expected to ease as systemic liquidity improves following the CRR cut and interest rates stabilise, the report further states.

Strong CASA Banks to Gain; Asset Quality Remains Benign

Banks with a strong CASA (current and savings accounts) base and liability management are likely to benefit from better spreads. Additionally, banking asset quality is expected to remain benign in FY26 on the back of lower slippages, higher recoveries and write-offs.

NBFC AUM Rises Sharply; Retail Share Increases

The assets under management (AUM) of NBFCs has witnessed a more than 1.7 times rise since FY21, and the share of retail within the AUM has been steadily inching up to 56 per cent in FY25 from 49 per cent in FY21. NBFCs’ aggregate asset quality has been improving, driven by stronger infra-financing NBFCs, notwithstanding the moderation in the retail book, especially the unsecured segment, the report observes.

MFI Segment Sees Pressure But Likely to Improve

Amongst asset classes, MFI has been affected the most and is expected to witness a mild growth of 4 per cent in FY26 after contracting 14 per cent in FY25. We expect credit cost for this segment at 6.1 per cent in FY26, down from 9 per cent in FY25, with improvement in overall earnings anticipated only post FY26.

MSME Lending Faces Higher Delinquencies

MSME lending is another segment witnessing higher delinquencies in the recent past, especially for lower ticket sizes. Credit costs are likely to inch up to 1.7 per cent in FY26 from 1.5 per cent in FY25. Affordable HFCs would continue to benefit from low credit costs of 0.4 per cent in FY26. Due to a larger base, AUM growth is expected to moderate slightly to 20 per cent, the CareEdge Ratings report points out.

Gold Loan Financiers to See Stronger Growth

After growing at a healthy 30 per cent in FY25, gold loan financiers are likely to report even higher growth of 35 per cent in FY26, supported by favourable gold prices and the recent relaxation of LTV norms for loans below Rs 2.5 lakh.

Overseas Education Loan Growth May Moderate

Growth in the overseas education loan segment is likely to moderate in FY26, driven by increased credit costs due to visa and job-related uncertainty in key markets such as the US.

Banking Sector Shows Resilience Despite Challenges

CareEdge Ratings executive director Sachin Gupta said that the banking industry has demonstrated resilience, with non-performing assets (NPAs), particularly within public sector banks, now at their lowest levels.

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NBFCs Outperform Banks, But Challenges Remain

"While banking credit offtake remains tepid, it has shown some improvement. In contrast, NBFCs have generally outperformed banks in credit growth, supported by overall improvements in asset quality. However, challenges within the NBFC space can be categorised across two dimensions: unsecured lending and small-ticket loans. Among these, small-ticket unsecured loans such as those extended to MFIs and to MSMEs have been most adversely impacted," he noted.

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