Banks profits set to moderate in FY26 as bad assets inch up: Ind-Ra

New Delhi: Increase in bad assets will impact banks' profitability in FY26, a domestic rating agency said on Tuesday.

Indian banks' profitability is at an "inflexion point" in FY25 and is likely to moderate further in the fiscal afterwards, India Ratings and Research said, adding that FY24 was the peak for profits.

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"Profitability (is)... expected to moderate further in FY26 with an expectation of rising slippages and higher credit costs over the FY24 levels which was at decadal lows," the agency's head and director financial institutions Karan Gupta told reporters here.

A bulk of the asset quality stress will emanate from the unsecured retail exposure, Gupta said, stressing that the same is "manageable" and will not have any systemic ramifications.

The under Rs 50,000 retail unsecured portion accounts for around 0.4 percent of the banking credit, while only 3.6 percent of the advances are the ones having a lending rate of over 11 percent, the agency said.

The agency further said that credit growth has "lost steam", and sharply revised down its FY25 system credit growth estimate to 13-13.5 percent as against 15 percent earlier, and also added that the core interest income is likely to be hit in the next fiscal.

Banks' net interest margin (NIM) will narrow by 0.10 percent in the new fiscal due to a transmission of past hikes, higher slippages and a change in accounting policies, the agency said.

The gap between credit and deposit growth, which has moderated lately, is likely to narrow in FY26, the agency believes.

Other challenges for the sector include the introduction of new norms on project finance which may require higher provisioning, liquidity coverage ratio under which lower proportion of liabilities may be available for lending and a transition to expected credit loss framework, the agency said, without sharing its expectations on when the same will be implemented.

The Reserve Bank's moves on bank regulation under former governor Shaktikanta Das's six-year term have made the sector more resilient and the central bank is unlikely to "completely dilute" the same in favour of addressing the growth requirements, an analyst said.

There is a possibility that the RBI's norms "can become less stringent" under the new Governor Sanjay Malohtra, the analyst said.

The agency has maintained its rating and outlook on banks, non-bank finance companies and housing finance companies, but tweaked the outlooks on certain asset segments due to the heightened stress possibilities.

Over the last five years, the average outstanding per microfinance borrower have increased by 25 percent, while the wage growth has been only 12 percent, the analyst said, adding that the ongoing improvements in rural economy portend well for the MFI segment.

The regulator's efforts to improve the gold loan standards will result in a 10-12 percent increase in operational costs for entities, the agency estimates.

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