Banking Loan Growth Forecast: Challenges and Opportunities in FY26

Ambit Capital's report forecasts a 12-14% loan growth in India's banking sector for FY 2026, amid easing liquidity. Despite challenges like tightening deposit conditions and rising credit costs, banks are leveraging technology and focusing on high-yield assets to maintain stable growth.

According to a report by Ambit Capital, the banking sector in India is expected to maintain a loan growth rate of 12 to 14 percent in the Fiscal Year 2026. The report highlights easing liquidity and the reduction of risk weights on unsecured retail as factors contributing to this forecast.

Recent RBI data shows that loan growth had moderated to 12 percent in February, marking the eighth consecutive month of slowdown from the previous year's 16.6 percent. High deposit pricing and softening yields are expected to keep pressure on banks' margins, impacting most lenders within the range of 5 to 20 basis points.

Ambit Capital notes that banks with a higher proportion of fixed-rate loans are better positioned regarding margins. Despite the pristine asset quality trend following Covid, an uptick in non-performing assets in retail loans has been observed, driven by a surge in unsecured retail lending. The report suggests that consolidation in retail lending will help banks identify balance sheet stress by the first half of FY26.

The report further indicates that while credit costs may rise in FY26, improved Provision Coverage Ratio (PCR) and well-built buffer provisions could offer some relief. Deposit augmentation remains challenging due to a shifting preference of urban savers toward better-yielding investments and increasing financial market penetration in rural areas. The technological rise is also contributing to diversification, yet maintaining deposit growth remains a significant challenge for most lenders.

(With inputs from agencies.)