Indian banking sector is poised for stronger performance in the second half of FY26: CareEdge Ratings

Banks expect stable credit growth and margins and sustainable asset quality, boosting confidence in the sector’s resilience, according to an assessment of the BFSI sector’s performance by the rating agency. | Photo credit: Getty Images

Banks expect stable credit growth and margins and sustainable asset quality, boosting confidence in the sector’s resilience, according to an assessment of the BFSI sector’s performance by the rating agency.

CareEdge Rating expects bank lending to grow 11.5 to 12.5 percent year-on-year in FY26, driven by the retail and SME segments, with corporate lending showing some momentum as borrowers shift from bond markets to banks, continuing to compound yield differentials.

Moreover, deposit growth lags behind loan growth, leaving the credit-to-deposit ratio at around 80%.

Meanwhile, net interest margins (NIMs) are expected to stabilize in the second half of the year as banks focus on their core profits and operational efficiencies, the agency said. At the same time, financing costs are expected to decline as system liquidity improves following the CRR (cash reserve ratio) reduction and interest rates stabilize.

According to CareEdge Ratings, banks with a strong CASA (current account, savings account) base and strong liability management are likely to benefit from better spreads.

Moreover, banking asset quality is expected to remain favorable in FY26 due to lower slippages, higher recoveries and write-offs.

Sachin Gupta, Executive Director and Chief Rating Officer, said while credit offtake by banks remains tepid, it has shown some improvement. Furthermore, given the interest rate cuts, credit decline and profitability remain critical observation points.

Sanjay Agarwal, Senior Director, noted that despite stable profitability and resilient asset quality, the outlook for the banking sector remains stable, with no material capital requirements expected.

Furthermore, banks are well positioned to manage the coming changes in credit risk capital requirements and the transition to the Expected Credit Loss (ECL) framework, supported by strong and resilient capital buffers.

NBFCs: Improving Asset Quality

The agency noted that the overall asset quality of NBFCs has improved, driven by stronger infra financing of NBFCs, despite moderation in the retail book, especially in the unsecured segment.

The assets under management (AuM) of NBFCs have risen over 1.7x since FY21, and the retail share of AUM has steadily increased from 49 per cent in FY21 to 56 per cent in FY25.

The agency opined that among asset classes, MFI (microfinance institution) is the most affected and is expected to witness a mild growth of 4 per cent in FY26 after a contraction of 14 per cent in FY25.

It expects credit costs for this segment to be 6.1 percent in FY26, compared to 9.0 percent in FY25, with an improvement in overall profits expected only after FY26.

The agency highlighted MSME loans as another segment that has witnessed higher delinquencies in the recent past, especially for smaller ticket sizes. Credit costs are likely to rise to 1.7 percent in FY26 from 1.5 percent in FY25.

CareEdge highlighted that affordable HFCs (housing finance companies) would continue to benefit from low credit costs of 0.4 percent in FY26. Due to a larger base, AUM growth is expected to moderate slightly to 20 percent.

After a healthy growth of 30 per cent in FY25, gold loan lenders are likely to report an even higher growth of 35 per cent in FY26, supported by favorable gold prices and the recent relaxation of loan-to-value (LTV) norms for loans below ₹2.5 lakh.

Growth in the overseas education loan segment is likely to moderate in FY26, driven by higher credit costs due to visa and job-related uncertainty in key markets such as the US.

Gupta said NBFCs have generally outperformed banks in terms of credit growth, supported by overall improvements in asset quality.

However, the challenges within the NBFC space can be divided into two dimensions: unsecured loans and small loans. Of these, small-dollar unsecured loans, such as those to MFIs and SMEs, have been hit the hardest.

Agarwal said the overall asset quality of NBFCs has improved, with a reduction in MFI delinquencies and other small loans, both secured and unsecured. Credit costs are expected to be bandwidth-related.

Published on November 27, 2025