India’s banking sector set for re-rating, but loan growth may stay moderate: Report

According to Kotak Institutional Equities, India’s banking sector could see a re‑rating as asset quality stays strong, although loan expansion is likely to stay modest.

The report says that asset quality should not pose a problem in the short term, with both public and private banks expected to record fewer slippages. Nonetheless, lenders may raise provisioning buffers as they move toward expected credit loss (ECL) frameworks.

“Valuations continue to look appealing even after recent gains, leaving room for multiple expansion and steady earnings growth,” the analysis states. Kotak adds that retail loan performance has improved relative to FY23 and pre‑pandemic levels, thanks to tighter underwriting standards introduced in FY24.

It also notes that “unsecured lending is poised for the most pronounced recovery after earlier stress.” At the same time, the report highlights some uncertainty about loan demand. It observes that while foreign capital inflows could cut funding costs by lessening banks’ reliance on deposits, this does not automatically lead to stronger credit expansion.

“We remain cautious about the demand for loans and believe that the robust inflow of foreign funds will mainly lower funding costs by reducing deposit demand rather than stimulating loan growth,” the report adds.

Looking at segment‑wise trends, MSME lending could experience pressure if a slowdown persists, though there is no broad‑based systemic risk at present, bolstered by government guarantee programmes such as ECLGS and CGTMSE.

Large corporate borrowers continue to exhibit financial stability, with banks willing to extend credit despite near‑term sectoral headwinds.

Although the advantages of better funding conditions may differ based on each bank’s growth strategy, the overall outlook remains positive. “We anticipate scope for multiple expansion alongside steady earnings compounding. In this setting, we keep a relative overweight position in leading private banks,” the note concludes.

Published on June 26, 2026