Banking Sector Overview
The past year witnessed significant foreign investment, policy rate cuts, stress in microfinance, and subdued credit growth. Looking into 2026, there is optimism for revival in credit growth, easing margin pressures, stable asset quality, and increased sector investments.
Key Concerns and Opportunities
- Deposit growth might slow down due to lower interest rates and rising alternative assets.
- Banks may rely more on capital markets for credit growth.
- Liquidity remains a critical factor.
Foreign Investments and Policy Impacts
- In 2025, $6 billion in foreign investments were attracted due to a favorable environment and India's growth potential.
- NIMs of scheduled commercial banks were affected by a 125-basis-point policy rate cut by the RBI.
- Rate-cut cycle appears to be ending, stabilizing bank margins.
Sector Outlook and Expert Opinions
Federal Bank expects easing NIM pressure and stable asset quality in 2026. IndusInd Bank notes a shift from consolidation to growth, focusing on disciplined execution and deposit mobilization. Stress in microfinance is stabilizing, with credit revival supported by GST rationalization and RBI rate cuts.
Market Dynamics and Funding Challenges
- Credit growth at 12%, deposit growth at 9.4% by end of 2025.
- RBI supports liquidity via OMOs and forex swaps, but long-term limitations exist.
- Funding credit growth while keeping costs low is a significant challenge.
Investor Concerns
- Risk management is vital with increased capital influx.
- Corporate lending needs to pick up to avoid energy scarcity in lending.
- Retail lending could become a bubble without job creation.
Banking Outlook for 2026
- Banks entering 2026 on strong footing.
- Expected stabilization of margins as rate cuts conclude.
- Liquidity remains a key risk.
- Funding credit growth is a primary challenge despite RBI's support.
