India’s Banking Outlook Remains Stable as Profitability Improves
Moody’s Ratings has kept a stable outlook on India’s banking system. This positive view is driven by strong economic growth, healthy asset quality, and solid capital reserves. These factors should help banks manage any new financial pressure.
Moody’s expects a favorable environment for banks over the next 12 to 18 months. This success is supported by steady government policies and high demand within the country. The agency predicts that India’s economy (GDP) will grow by 6.4% in FY27. This is the fastest growth among G-20 nations, providing a perfect backdrop for banks to expand their business.
Loan Growth Is Expected to Rise
Overall loan growth across the banking system is expected to speed up slightly, reaching 11% to 13% in FY27. This is an increase from the 10.6% seen so far in FY26. This growth is being fueled by consumer spending and helpful government policies.
While some small businesses (MSMEs)—especially those exporting textiles or jewelry—might face stress, Moody’s believes banks are well-prepared. Most banks have saved enough money (loan-loss reserves) to handle these potential risks.
The agency also expects the “bad loan” ratio (NPL) to stay low, between 2% and 2.5%. While some new loans might run into trouble as they age, the quality of retail and corporate loans remains strong. Large companies, in particular, are showing better profits and healthier balance sheets.
Improving Profitability and Margins
Moody’s predicts that Net Interest Margins (NIMs)—the difference between what banks earn on loans and what they pay on deposits—will gradually improve. This is because the cost of keeping deposits is expected to fall.
In 2025, the Reserve Bank of India lowered interest rates to 5.25%. As these lower rates finally affect deposit costs, banks will see better margins. Because of this, the industry’s Return on Assets (RoA) is expected to reach 1.2% to 1.3% in FY27. Banks will also likely earn more from services like insurance and wealth management.
Strong Capital and Financial Buffers
India’s banks have plenty of capital, thanks to strong earnings and previous fundraising. Their capital levels are well above what regulators require, meaning they don’t need to rush to raise more money even as they continue to grow.
New accounting rules (IFRS 9) will start in April 2027, which might slightly lower capital ratios. However, Moody’s expects the overall impact to be neutral. Lower risks on home and small business loans will likely balance out the higher costs of other types of lending.
Secure Funding and Government Support
Funding and liquidity (available cash) are expected to stay stable. Loans are growing at roughly the same rate as deposits, keeping the system balanced. While banks are still competing hard for customer deposits, they have enough cash reserves to remain safe.
Finally, Moody’s highlighted that the Indian government continues to provide strong support, especially to public sector banks. This backing ensures that India’s banking system remains a pillar of stability, even when global markets are uncertain.
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