India’s banking sector is well-positioned for future growth, thanks to better asset quality, stronger capital reserves, and consistent profitability.
According to Fitch Ratings in June 2025, Indian banks should maintain solid performance across most credit measures in fiscal year 2026, with the exception of earnings, which may face pressure from cyclical shifts in margins and credit costs.
Currently, loan growth in the sector is at its slowest in four years, at 10.6%. This slowdown is particularly evident in lending to non-bank financial institutions (NBFIs) and unsecured retail customers, due to stricter regulations and tighter funding. However, Fitch anticipates loan growth will bounce back to 12% to 13% in FY2026, driven by supportive monetary policy and improved funding conditions.
Key Challenges and Improvements
Banks will need to focus on attracting more deposits to maintain the significant 120 basis point improvement they’ve seen in their loan-to-deposit ratios.
Asset Quality
On a positive note, the impaired loans ratio dropped by 60 basis points to 2.2% in FY2025, with bad loans decreasing by 12%. Fitch believes that for most banks, impaired loan ratios and credit costs have reached their lowest point. Some banks might even see further improvement by writing off older bad loans.
Overall, Fitch expects the Indian banking sector to continue its stable performance, with sound core financial metrics enhancing their ability to absorb losses and withstand economic shocks. This resilience should further support the standalone credit profiles of rated banks.
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