Fitch’s latest analysis highlights that the financial year ending March 2025 (FY25) saw Indian banks reinforce their standalone credit profiles, supported by solid financial performance. The rating agency expects most credit metrics to remain stable in FY26, although earnings may face pressure from narrowing margins and rising credit costs due to cyclical factors.
Loan growth slows but set to rebound
Loan growth for the sector moderated to 10.6% in FY25—the lowest since FY21—due to reduced lending to non-bank financial institutions and unsecured retail borrowers amid tighter regulatory oversight and funding constraints. Notably, state-run banks outpaced private counterparts for the first time in nearly a decade, posting 12.4% growth, thanks to more favourable loan-to-deposit ratios (LDRs). Fitch expects this trend to persist into FY26 as private lenders address stress in unsecured portfolios and elevated LDRs.
Sector loan growth is projected to recover to 12–13% in FY26, driven by looser monetary policy and improved funding conditions. However, Fitch notes that strong deposit mobilisation will be key to maintaining the 120 basis point LDR improvement recorded in FY25.
Asset quality strengthens
The sector’s impaired-loan ratio dropped by around 60 basis points to 2.2% in FY25, bolstered by a 12% decline in bad loans. While recoveries and write-offs slowed due to the diminishing stock of legacy non-performing assets, they were still sufficient to offset new slippages. Fitch-rated banks fared even better, with a 90 basis point improvement and maintaining 80% loan-loss coverage.
Though private banks experienced higher levels of new bad loans, all banks reported net improvements. Fitch believes the sector has likely reached the bottom for impaired-loan ratios and credit costs, forecasting a potential 20 basis point decline in bad loans during FY26, aided by stronger growth, write-offs, and a strategic shift toward secured lending.
Profitability under pressure
Despite a 20 basis point drop in net interest margins (NIM), banks maintained profitability through low credit costs, treasury gains, and recoveries on written-off loans. Bad loan provisions fell to 15% of pre-provision profits, while Fitch-rated banks sustained an operating profit to risk-weighted asset (OP/RWA) ratio above 3%—higher than the sector average of 2.8%.
However, Fitch anticipates a slight moderation in FY26, with NIM expected to contract by 30 basis points and credit costs to rise by 10–15 basis points. These impacts are likely to be cushioned by increased loan growth and continued treasury gains.
Capital buffers strengthen
The sector’s average common equity Tier 1 (CET1) ratio improved by 40 basis points to 14.2% in FY25, driven by internal capital generation and lower risk-weighted assets. While private banks continued to lead with an estimated CET1 ratio of 16.4%, state-owned banks have significantly narrowed the gap—now just 340 basis points—due to improved profitability and targeted capital issuance.
We expect these drivers to support higher CET1 ratios in FY26, despite some earnings normalisation, it says.
Outlook
Fitch expects the steady performance of the banks to continue, though sustaining sound core financial metrics that strengthen loss-absorption buffers and resilience to economic shocks relative to the previous cycle would support positive momentum for rated banks’ standalone credit profiles.