Indian banking sector gears up for 12-14 percent loan expansion in FY26

New Delhi: Indian banks are expected to register loan growth of 12-14 per cent in the financial year 2025-26 (FY26), driven by an increase in deposit inflows, according to a report by Ambit Capital Research.

Loan Surge Ahead

The report emphasized that the banking industry has begun to notice some ease in loan-to-deposit ratios (LDRs) after bracing challenges over liquidity and asset quality. It is largely contributed by a moderate increase in deposits and a moderate growth in disbursement of loans.They opine that the trend will also be seen in the end-of-period LDR. Also, relaxation in liquidity conditions and a potential cut in risk weights on unsecured retail loans are likely to underpin stable loan growth. It stated "With relaxation in liquidity and likely relaxation of risk weights on unsecured retail, we expect sector loan growth to remain at 12-14 per cent in FY26E". Even as it helped improve liquidity, the report stated that the banks are expected to experience pressure on their net interest margins (NIMs) in FY26. The reason behind this is high costs of deposits and decreasing yields, that may reduce the spread by 5-20 basis points for most lenders.

Loans Set for Double-Digit Growth in FY26

Still, the effect will differ based on the portfolio composition and liability structure of a bank. Banks with a greater proportion of fixed-rate loans will probably be able to maintain their margins better than banks with a higher proportion of variable-rate loans. The report also highlighted a surge in non-performing assets (NPAs) in the retail segment owing to a spurt in unsecured retail loans like personal loans and credit cards. Although banks had kept their asset quality robust after COVID, the increasing size of unsecured loans has contributed to increased retail defaults over the last few years. To tackle this problem, banks have begun consolidating their retail lending portfolios, which will help them recognize and contain balance sheet pressure by the first half of FY26.

Banking Sector on the Rise

While credit expenses are likely to increase in FY26, banks have made robust provisions of 0.7-1.7 per cent of total loans. The provision cover ratio (PCR) stands at the level of about 70%, which must give a small buffer against defaults. With improving liquidity conditions and potential regulatory relief, like a cut in risk weights on unsecured retail loans, the banking industry is likely to grow steadily. Banks will, however, have to manage deposit expenses, margin stress, and asset quality issues to ensure financial stability in FY26.