Indian banks profits may dip in FY26 on margin squeeze, says CRISIL report

India's banking system faces profitability concerns, yet CRISIL Ratings predicts credit growth of 12-13 percent

Indian banks’ profits could come under pressure in FY26 on faster downward repricing of assets compared to liabilities, particularly with anticipated policy rate cuts of 50-75 basis points, a CRISIL Ratings report released on April has said.

“We expect a compression in the bank net interest margins (NIMs), and this could lead to a marginal reduction in the return on assets of about 1.1-1.2 percent,” said Somasekhar Vemuri, senior director, CRISIL Ratings, while releasing the report.

The report forecasted a credit growth of 12-13 percent in FY26, driven by sectoral growth, tax breaks, lower lending rates, and easing inflation.

Deposit growth remain a critical bottleneck. “The advances growth will centrally hinge upon how fast there is a pickup in the deposit growth rates,” CRISIL Ratings managing director Subodh Rai said.

Asset quality is expected to remain stable, with gross non-performing assets (NPAs) estimated to have bottomed out at 2.4 percent as of March 2025 and projected to stay range-bound through FY26.

While corporate NPAs are likely to remain low, retail ones, especially in the unsecured segment, will likely see an uptick.

The microfinance segment is grappling with significant challenges, the report said. “AUMs [assets under management] in this segment have declined marginally in FY25, and we expect a cautious recovery in fiscal 2026,” the report said.

The report attributed asset quality issues in microfinance to over-leveraged borrowers, debt waiver campaigns in some states and operational hurdles like heatwaves and staff attrition.

Unsecured loans, particularly smaller-ticket sizes catering to vulnerable borrowers, are also expected to see deterioration.

In the broader NBFC sector, the report projected a steady AUM growth at 15-17 percent in fiscal 2026, aligning with the year gone by.

Secured asset classes such as vehicle and home loans are poised to lead growth. Vehicle loans are expected to rise 15-16 percent and home by 13-14 percent.

Unsecured loan segment is expected to grow at 15-16 percent, a sharp decline from a compound annual growth rate (CAGR) of nearly 45 percent through fiscal 2024, due to rising household indebtedness and asset quality concerns.

Despite these pressures, the outlook on NBFC profitability remains positive, with a projected return on managed assets of 2.3 percent, the report said.