India’s banks poised for growth despite margin and cost pressures

Impaired loans ratio and credit costs for most banks have bottomed, Fitch said.

India’s banking sector is positioned for future growth on improved asset quality, stronger capital buffers, and stable profitability.

“We believe banks can sustain steady performance across most credit metrics in FY2026, except for earnings due to cyclical pressures on margins and credit costs,” Fitch Ratings said in a commentary in June 2025.

Sector loan growth is its slowest in four years, at 10.6%. Lending to non-bank financial institutions (NBFIs) and unsecured retail customers slowed on tighter regulatory scrutiny and funding conditions.

Loan growth is expected to rebound to 12% to 13% in FY2026, with Fitch noting an “accommodative monetary policy and easing funding conditions.”

But banks will face having to improve their deposit mobilision in order to preserve their nearly 120 basis points (bp) improvement in loan-to-deposit (LDR) ratios.

Impaired loans ratio fell by 60 bp to 2.2% in FY2025, with bad loans falling by 12%.

“We believe the impaired-loan ratios and credit costs for most banks have bottomed. Some banks may still improve given scope for write-offs in legacy bad loans that will further reduce the bad loan stock,” Fitch said.

Overall, Fitch expects the Indian banking sector’s steady performance to continue.

“We expect steady performance to continue, though sustaining sound core financial metrics that strengthen loss-absorption buffers and resilience to economic shocks relative to the previous cycle would support positive momentum for rated banks’ standalone credit profiles,” it said.