A steady expansion in lending activity continues to support India’s banking sector, even as concerns around margins and macroeconomic factors remain. A report by Systematic Institutional Equities highlights that credit growth has stayed strong in the near term.
“The strong advances growth momentum that got built at the end of 3QFY26 has sustained in Q4FY26,” the report noted. System-level advances recorded a growth of 13.8% year-on-year as of mid-March 2026, driven by broad-based traction across segments.
However, the report flagged possible moderation ahead. “Growth momentum in advances is expected to slightly moderate, arising from higher inflation and slowdown in economy,” it said, pointing to macroeconomic headwinds that could impact future expansion.
On profitability, the outlook remains positive. Earnings are expected to improve year-on-year, supported by sustained credit growth, higher fee income, and lower credit costs.
Margins, however, are likely to remain under pressure. “We expect margins to remain range-bound in 4QFY26… Overall… NIMs [are] marginally lower to flat,” the report stated. It added that net interest margins are expected to move sequentially within a narrow range of -5 bps to +2 bps, indicating limited upside.
A key structural concern highlighted is the gap between credit and deposit growth. “Deposit growth continues to lag advances growth,” the report said, with the credit-deposit ratio rising to around 83%.
On asset quality, trends appear to be improving, especially in unsecured segments. “The stress in unsecured segment continues to moderate,” it said, with slippages expected to remain controlled in the near term.
At the same time, the report warned of potential risks. “There is an upside risk to slippages in the coming quarters,” indicating a possible increase in credit costs going forward.
Overall, the sector outlook remains balanced. While margins may stay stable to slightly better, some stress build-up could lead to marginally higher credit costs. The report maintains a positive view on select banks, supported by steady growth visibility and improving earnings.
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