Indian banking industry poised for a stronger performance in the second half of FY26: CareEdge Ratings

Banks anticipate a stable credit growth & margins, and sustained asset quality, reinforcing confidence in the sector’s resilience, per an assessment of the BFSI sectors performance by the credit rating agency.
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India’s banking sector is projected to strengthen significantly during the second half of fiscal year 2026, fueled by favorable macroeconomic trends, reduced funding expenses, stable asset quality indicators, and early signals of consumption recovery, as analyzed by CareEdge Ratings.

The rating agency’s evaluation of banking sector performance indicates confidence in sustained credit expansion, steady profit margins, and robust asset quality metrics. Banking institutions forecast these positive trends to reinforce the financial system’s stability through FY26.

Banking credit is projected to expand between 11.5% and 12.5% annually during FY26. This acceleration will be primarily propelled by retail and MSME lending segments, while corporate borrowing may gain momentum as companies shift from bond markets to bank financing due to interest rate differentials.

Deposit mobilization continues to trail credit expansion, maintaining the credit-deposit ratio near 80% levels. Margin pressures are expected to ease during the latter half of FY26 as financial institutions optimize operational efficiencies and core revenue streams. This stabilization coincides with anticipated improvements in systemic liquidity following CRR adjustments and interest rate equilibrium.

Financial institutions with substantial current and savings account deposits are positioned to achieve superior interest spreads through effective liability management strategies.

Asset quality metrics are forecast to remain healthy during FY26, supported by decreased fresh slippages alongside elevated recovery and write-off activity.

Sachin Gupta highlighted that while credit expansion remains moderate, recent improvements are notable. He emphasized that future interest rate trajectories will critically influence both credit demand and profitability outcomes.

Sanjay Agarwal noted the sector’s capital adequacy remains robust, with stable profitability and resilient asset quality diminishing near-term capital requirements. Banking institutions demonstrate preparedness for forthcoming regulatory alterations, including capital charge revisions and transition to expected credit loss models, supported by strong capital buffers.

NBFC Sector Developments

Non-banking financial institutions demonstrate improved aggregate asset quality, driven by infrastructure-focused NBFCs, despite marginal deterioration in unsecured retail portfolios.

The NBFC sector’s cumulative assets under management have expanded over 1.7 times since FY21, with retail exposure increasing to 56% of total AUM from 49% during this period.

The microfinance segment has experienced significant disruption, with projected FY26 growth moderating to 4% following a 14% contraction in FY25. Credit costs in this segment are anticipated to decline from 9.0% to 6.1% year-on-year.

Small-ticket MSME lending exhibits elevated delinquency patterns, particularly at lower borrowing thresholds. Associated credit costs are forecast to rise modestly to 1.7% during FY26.

Affordable housing finance companies maintain minimal credit costs at 0.4% alongside steady 20% AUM expansion projections. Gold loan providers anticipate accelerated 35% growth next fiscal year, boosted by revised LTV regulations and gold price appreciation.

International education loan growth may moderate in FY26 due to increased credit costs stemming from employment uncertainties in primary destination markets.

Gupta observed that NBFCs continue to outpace banks in credit expansion, though segment-specific challenges persist. Small-ticket unsecured products across microfinance and MSME segments remain particularly vulnerable to asset quality pressures.

Agarwal highlighted the NBFC sector’s aggregate improvement in asset quality metrics, with delinquencies stabilizing across product categories. Credit costs are projected to remain within predictable ranges through the fiscal cycle.

Published on November 27, 2025