Steady Course Ahead: Indian Banks to Navigate Financial Challenges in FY26

Indian banks are projected to maintain steady performance in most credit metrics during FY26, despite earnings facing pressure from cyclical challenges, according to a recent Fitch Ratings report. FY25 saw strong results, supporting standalone credit profiles and positioning the sector for growth.

Fitch warns earnings in FY26 may face challenges due to narrowing margins and elevated credit costs. While overall loan growth in FY25 was the slowest in four years, improved asset quality and stronger capital buffers were noted. Loan growth stood at 10.6% due to reduced lending to non-bank financial institutions and unsecured customers amid regulatory scrutiny.

The report expects lending constraints to last another year as private banks address asset quality issues and high loan-to-deposit ratios. However, a rebound to 12-13% loan growth is forecast for FY26 with supportive monetary policies. Improved deposit growth will be vital to maintaining gains, and further improvements in impaired-loan ratios via legacy loan write-offs are anticipated.

(With inputs from agencies.)