Amid rising global and macroeconomic uncertainties, banks are facing reduced clarity on growth prospects, prompting a more cautious approach across the sector.
A recent report by Kotak Institutional Equities highlights that lenders are becoming more risk-averse due to unclear demand conditions and shifting borrower sentiment. This is expected to slow credit expansion in the near term, even as asset quality remains stable for now.
The report notes that growth headwinds are building, leading banks to prioritise low-risk borrowers. At the same time, borrower confidence is weakening, further affecting lending momentum. The overall outlook remains uncertain, with no clear base scenario emerging, making it difficult for banks to take strong strategic positions.
Valuations of private banks compared to public sector banks are currently near historical lows. However, while this limits the chances of continued outperformance by public sector banks, there is also no strong case for a sharp rebound in private bank valuations. As a result, the report suggests a “wait-and-hold” strategy for investors.
The brokerage outlines 2 possible scenarios. In the first, easing geopolitical tensions could restore conditions seen before February 2026. This would support moderate credit growth of 10–12% year-on-year, stable asset quality, and ongoing competition between private and public banks, although profitability may remain under pressure.
In the second scenario, continued geopolitical and inflation pressures could lead to tighter interest rate cycles and slower credit growth. Banks may tighten lending standards further, with profitability and asset quality depending on how long the slowdown lasts.
Despite these risks, asset quality is expected to remain stable across most segments in the near term. However, some stress may emerge in the MSME segment, which is more sensitive to tighter credit conditions following strong recent growth. The report adds that while risks in this segment are being closely monitored, there is no clear sign of widespread deterioration yet.
It also compares the current situation to the post-Covid period, where risks appeared high but actual credit losses remained limited due to policy support and recovery in credit flow.
Overall, while growth risks are increasing, stable asset quality is keeping the sector in a cautious “wait-and-hold” phase until there is more clarity on demand and economic stability.
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