Loan growth, profitability ahead for public-sector banks

The Indian banking sector could be due for a rise in profitability after several quarters of net interest margin or NIM compression. The Q2FY26 results suggest NIMs have bottomed out. Credit costs could also fall given moderating stress in unsecured retail and microfinance institutions or MFIs.

- DEVANGSHU DATTA

System credit growth may lift to 13-14 per cent Y-o-Y(it was 11 per cent as of Oct 31) due to favourable fiscal policies (GST 2) and monetary policies such as cuts in cash reserve ratio cuts and repo rate. This could lead to mid-teens earnings growth over FY26-28 (7 per cent over FY24-26).

A broad-based pickup in privatesector capex is not visible but delinquency trends show improvement. In to a decline of 2.1 per cent Y-o-Y for private sector banks (PVBs).

The rise in PSB profits is attributed to fee income and treasury gains, alongside credit growth in retail and MSME segments, and lower opex. The decrease in profits for PVBs is due to slower corporate demand, flat interest income, and continued stress in MFI and unsecured segments.

In H1FY26, large PSBS mobilised over ₹45,000 crore via qualified institutional placement or QIPS and Basel-III, while PVB raised over 15,000 crore (mainly Tier-II bonds). The impact of shifting to expected credit loss or ECL models is estimated to be 60 to 70 bps of capital adequacy, which banks can absorb easily over four years.