 "Banks' profitability likely to moderate in FY26, says India Ratings")
Indian banks’ profitability is expected to moderate in FY26 after reaching an inflexion point in FY25, due to delinquencies from over-leveraging of unsecured assets and an increase in unsecured credit costs, analysts at India Ratings said on Tuesday.
“Ind-Ra estimates that the rapid improvement in financial metrics seen over FY21-FY24 is likely to have peaked and will reach an inflexion point in FY25, followed by further moderation in FY26,” the press release stated.
The rating agency observed an increase in delinquencies in certain retail segments, including personal loans, credit cards, and microfinance. Banks’ retail loan quality has been stable, with the gross non-performing asset (GNPA) ratio at 1.2 per cent in H1 FY25. The special mention account (SMA) ratio in retail declined to 2.5 per cent in H1 FY25 from 3 per cent in H1 FY24.
The GNPA ratio for unsecured lending was marginally higher at 1.7 per cent. “The rise in delinquencies appears to have been driven by a combination of self-employed individuals, those with informal or semi-formal income sources, and younger populations,” analysts at the rating agency noted.
Meanwhile, banks’ credit growth is expected to moderate to around 13-13.5 per cent in FY25 and FY26, with a slowdown in lending to non-banking financial companies (NBFCs) and the retail sector. At the same time, a revival in corporate loans is anticipated.
On the other hand, deposit growth is expected to be around 12-13 per cent for FY26, with increased competition for low-cost current account savings accounts (CASA).
NBFCs are also likely to experience a slowdown in loan growth in FY26 to 18.5 per cent, driven by a decline in unsecured lending as they calibrate their business expansion plans to optimise risk-adjusted profitability over the medium term.
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In the microfinance sector, India Ratings has revised its outlook from neutral to deteriorating due to multiple headwinds, including borrower over-leveraging for MFI and non-MFI loans, reduced centre attendance, high attrition at branch levels, and instances of fraud. These challenges are leading to higher operating and credit costs in the medium term.
“Ind-Ra has revised the sector outlook on MFIs to deteriorating from neutral, while maintaining a stable rating outlook for FY26. Near-term challenges are likely to continue, with recovery expected in the second half of FY26. The stable rating outlook factors in adequate capitalisation and liquidity buffers, as well as sufficient pre-provision operating profit (PPoP) margins to absorb the current asset quality downturn,” said Karan Gupta, head and director, financial institutions, India Ratings.