Banking credit is expected to grow at 11.5%–12.5% year-on-year in FY26, driven by retail and MSME segments, with corporate lending gaining momentum as borrowers shift from bond markets to banks, which remains consistent with the yield differences. Deposit growth continues to lag behind loan growth, keeping the Credit-to-Deposit ratio high at approximately 80%, according to the CareEdge ratings press release.

Meanwhile, Net Interest Margins (NIMs) are expected to stabilise in H2 as banks focus on core earnings and operational efficiency. At the same time, funding costs are expected to ease as systemic liquidity improves following the CRR cut and interest rates stabilise. Banks with a strong CASA base and effective liability management are likely to benefit from better spreads. Additionally, banking asset quality is expected to remain benign in FY26 due to lower slippages, higher recoveries, and write-offs, the press release stated.

The Indian banking industry is poised for stronger performance in the second half of FY26, supported by improving macroeconomic conditions, easing funding costs, benign asset quality, and early signs of a consumption rebound. Banks expect stable credit growth and margins, along with sustained asset quality, reinforcing confidence in the sector’s resilience.

Sachin Gupta, Executive Director and Chief Rating Officer, CareEdge Ratings, said, “The banking industry has demonstrated resilience, with non-performing assets (NPAs), particularly within public sector banks, which historically had faced significant challenges, now at their lowest levels. While banking credit offtake remains tepid, it has shown some improvement. Further, considering the interest rate reductions, credit offtake and profitability remain critical areas of observation. In contrast, NBFCs have generally outperformed banks in credit growth, supported by overall improvements in asset quality. However, challenges within the NBFC space can be categorised across two dimensions: unsecured lending and small-ticket loans. Among these, small-ticket unsecured loans such as those extended to MFIs and to MSMEs have been most adversely impacted.”

The Assets under Management (AUM) of NBFCs has increased by more than 1.7 times since FY21, and the retail share within the AUM has steadily grown to 56% in FY25 from 49% in FY21. NBFCs’ overall asset quality has been improving, driven by stronger infra-financing NBFCs, despite the slowdown in the retail segment, especially in unsecured loans.

Among asset classes, MFI has been the most impacted and is forecasted to grow by 4% in FY26 after contracting by 14% in FY25. We anticipate credit costs for this segment at 6.1% in FY26, down from 9.0% in FY25, with improvements in overall earnings expected only after FY26.

MSME lending has seen higher delinquencies lately, especially for smaller ticket sizes. Credit costs are expected to rise to 1.7% in FY26 from 1.5% in FY25. Affordable HFCs will continue to benefit from low credit costs of 0.4% in FY26. Due to a larger base, AUM growth is projected to slow slightly to 20%.

After a healthy 30% growth in FY25, gold loan financiers are likely to achieve even higher growth of 35% in FY26, supported by favourable gold prices and recent relaxation of LTV norms for loans below Rs. 2.5 lakh. Growth in the overseas education loan segment is expected to slow in FY26 due to increased credit costs stemming from visa and employment uncertainties in key markets such as the US, according to the press release.