Indian Banks’ Profitability And Margins To Improve In 2026–27: India Ratings

Profitability in the Indian banking sector is expected to improve in the financial year 2026-27, largely due to better net interest margins, according to India Ratings and Research. However, the rating agency notes that any meaningful improvement in NIMs is likely to be delayed until the fourth quarter of FY26 through the first quarter of FY27.

Ind-Ra maintains a neutral outlook on the overall banking sector for FY27, citing a turning point in growth perspectives driven by a reversing interest rate cycle and an average liquidity surplus of ₹1.9 trillion maintained by the Reserve Bank of India. According to Ind-Ra, the shift in the sector is largely underpinned by improved retail credit affordability. This improvement follows a 125 basis point reduction in the repo rate, a reduction in Goods and Services Tax rates, and revised risk weights for non-banking financial companies designed to boost credit.

Furthermore, the agency highlights policy changes such as the revised definition for micro, small and medium enterprises—which doubles turnover limits—and a 2.5-fold increase in investment limits, making a larger number of businesses eligible for MSME credit. Data reported by Ind-Ra indicates that credit growth accelerated to 11.4% year-on-year in November 2025, rising from 10.4% in October 2025. The latest fortnightly data from December 15 suggests this momentum is sustaining at 12.0%.

Karan Gupta, Head and Director Financial Institutions at Ind-Ra, states: “Ind-Ra has maintained a neutral sector outlook for banks and a Stable rating outlook for private banks and public sector banks for FY27. Elevated loan deposit ratios remains a constraining factor for the system at 81.9% in 1HFY26, limiting the FY27 loan growth to 13%. Profitability is expected to improve in FY27, largely due to better net interest margins, early signs of improvement in unsecured retail stress, and moderating credit costs (FY27: 71bp, FY26: 78bp), supporting a gradual recovery in earnings in the near term.”

 The agency flags deposit accretion as a structural concern, although it describes the quality of the deposit franchise as a significant victory. Between the first quarter of FY23 and the first quarter of FY25, growth in advances consistently surpassed deposit growth by an average surplus of 650 bps. This trend resulted in tight systemic liquidity and elevated loan deposit ratios. Ind-Ra notes this period coincided with buoyant economic momentum where the RBI raised repo rates by 250 bps between April 2022 and February 2023. Consequently, renewed activity in public sector banks and private banks targeting the retail and MSME segments pushed the LDR to 80.3% in FY25, up from 70.0% in FY21.

Since April 2025, the RBI has consistently attempted to revive the economy. Ind-Ra observes that recent trends suggest a buoyant recovery environment for FY27, characterised by a revival in lending to NBFCs and the retail sector, alongside a lower yield curve supporting corporate disbursements. However, the agency states that the elevated loan deposit ratios remain a major constraining factor, standing at 81.9% for the system in the first half of FY26 (Private Banks: 90.1%; PSBs: 77.0%). This indicates structural concerns regarding deposits. As a result, Ind-Ra expects advances growth to remain at 13% for FY27 (FY26: 13%), which will outpace deposit growth of 11.4% (FY26: 10.7%). Loan deposit ratios are projected to rise further to 83.2% in FY27, potentially constraining incremental growth. Consumption demand is set to support growth in the second half of FY26 and FY27. Ind-Ra notes that between the first quarter of FY25 and the second quarter of FY26, banks exercised caution in retail lending due to asset quality concerns in unsecured loans and a slowdown in NBFC lending. This was impacted by the RBI’s higher risk weight requirements and lower capital market rates. Ind-Ra highlights that tight liquidity, muted spreads, and elevated loan deposit ratios made banks selective, slowing corporate lending where private capital expenditure was already sluggish and corporates were deleveraging.

The banking system began showing signs of recovery from July 2025 onwards. Accordingly, Ind-Ra forecasts credit growth to rise to 13% year-on-year in FY26 and FY27, largely driven by improved consumption demand led by GST rationalisation, lower inflation, and capex disbursals in the coming quarters. The performance of public sector banks is consistently improving. Ind-Ra data shows that PSBs held a dominant 76.1% market share of advances in FY14, which steadily declined to 58.1% by FY24.

However, for the first time since FY10, PSBs recorded growth of 13.0% in advances in both FY25 and the first half of FY26, outpacing private banks which grew at 9.0% and 9.9% respectively. Similarly, PSBs experienced a significant erosion of their market share in total deposits over the past decade, falling from 77.7% in FY14 to 62.9% in the first half of FY26. However, Ind-Ra highlights a notable shift: while PSBs consistently lost over 100 bps in market share annually since FY15 (except FY20), the loss was limited to 50 bps in FY25. This occurred despite aggressive deposit garnering by HDFC Bank, where deposits grew at 14.1% year-on-year versus 11.0% for the industry in FY25. In fact, PSBs gained a deposit market share of 36 bps in the first half of FY26. Regarding asset quality, Ind-Ra reports that PSBs have shown resilient quality and diminished differentiation from private banks. Historically, PSBs lagged behind private banks in underwriting standards. However, over the past five years, the gap in gross non-performing assets (GNPA) and net non-performing assets (NNPA) between PSBs and private banks reduced to 58 bps and negative 3 bps, respectively, in the first half of FY26. This compares to gaps of 420 bps and 170 bps in FY20. The sector's overall asset quality improved to a decadal low, with GNPAs at 2.2% and NNPAs at 0.5% in the first half of FY26. From the first quarter of FY25 onwards, stress in unsecured retail credit became evident, particularly among private banks in segments such as personal loans, credit cards, microfinance, and commercial vehicle loans. This resulted in a consistently high slippage ratio of nearly 1.8% during FY25 through the first half of FY26 for private banks. In contrast, PSBs fared better with an average slippage ratio of 90 bps during the same period. Ind-Ra notes that a bank’s loan mix influences these outcomes, as private banks generally hold a higher share of retail unsecured loans than PSBs. The agency indicates that the earnings trajectory might revive in FY27 after topping out in FY25. During FY25 through the first half of FY26, sector earnings fell due to margin pressure from high funding costs, weak macro conditions, and slower loan growth. While deposit repricing continues following cumulative rate cuts of 125 bps since February 2025 (including 25 bps in December), Ind-Ra expects the third quarter of FY26 to mark the end of the earnings deceleration cycle.

Any improvement in margins is likely to be delayed until the fourth quarter of FY26 or first quarter of FY27, aided by phased cuts in the cash reserve ratio (CRR) to ease liquidity constraints. Ind-Ra expects credit costs to have peaked at 78 bps in FY26, moderating to 71 bps in FY27, with net slippages at 56 bps. The agency projects sector Return on Assets (RoA) to rise to 1.32% in FY27 from 1.26% in FY26, favouring banks with strong liability profiles, robust capital buffers, and a prudent risk management framework.