India's banking sector to see sustained credit growth amid pressures

India's banking sector is expected to sustain credit growth momentum with improved profitability, a new report finds. However, margin pressures, a widening credit-deposit gap, and emerging asset quality risks present a balanced outlook for the sector.

India's banking sector is expected to sustain credit growth momentum in the near term, though margin pressures are likely to persist, according to a research report by Systematic Institutional Equities. The report highlights that advances growth remains robust, supported by broad-based traction across segments.

"The strong advances growth momentum that got built at the end of 3QFY26 has sustained in Q4FY26," it noted, adding that system-level advances grew 13.8 per cent year-on-year as of mid-March 2026. However, growth is likely to moderate going forward amid macro headwinds. The report cautioned, "Growth momentum in advances is expected to slightly moderate, arising from higher inflation and slowdown in economy."

Profitability and Margin Outlook

On profitability, the sector outlook remains constructive. The report said earnings are expected to improve year-on-year, driven by multiple levers, the profitability is expected to improve YoY led by sustained advances growth, higher fee income and lower credit costs.

The report says that net interest margins (NIMs) are expected to remain largely stable with mild pressure. "We expect margins to remain range-bound in 4QFY26... Overall... NIMs [are] marginally lower to flat," the report stated, citing the lagged impact of rate cuts and benefits from deposit repricing. Further, it added: NIMs are expected to sequentially move in the range of -5bps to +2bps, indicating limited upside in spreads.

Credit-Deposit Growth Divergence

A key structural trend flagged is the divergence between credit and deposit growth. "Deposit growth continues to lag advances growth," the report said, noting that this has pushed the credit-deposit ratio higher to around 83%.

Asset Quality and Emerging Risks

On asset quality, the report indicated improving trends in unsecured segments. "The stress in unsecured segment continues to moderate," it said, with slippages expected to remain under control in the near term. However, it also warned of emerging risks: "There is an upside risk to slippages in the coming quarters," suggesting a potential increase in credit costs ahead.

Steady Outlook with Balanced Risks

Summing up, the report noted that the sector outlook remains steady with balanced risks. NIMs are expected to be stable to better, with some build-up of stress resulting in marginally higher credit cost. It maintains a positive stance on select banks, backed by sustained growth visibility and improving earnings trajectory.

(ANI)

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