India’s banking sector return on assets (RoA) is expected to moderate to 1.15-1.2% this fiscal from 1.3% in the previous financial year, mainly due to lower treasury income and higher pre-emptive provisioning ahead of the transition to the expected credit loss (ECL) framework, according to a report by Crisil Ratings. 

Despite the decline, the sector’s profitability is expected to remain well above the 20-year average of 0.8% and the 10-year average of 0.6%. 

The report said reduced treasury income due to rising bond yields and additional provisioning ahead of the implementation of the ECL framework from April 2027 are likely to weigh on profitability during the fiscal year. 

Net interest margins (NIMs) are expected to remain broadly stable at around 2.9% this fiscal after declining by 20 basis points last year, although margins may moderate from the peak levels seen in the fourth quarter of FY25. 

Subha Sri Narayanan, Director at Crisil Ratings, said the cost of liabilities for banks has likely bottomed out. “Outstanding deposit rates declined by around 50 basis points against a fall of nearly 80 basis points in lending rates last fiscal following cumulative repo rate cuts of 125 basis points. However, as credit growth continues to outpace deposit growth, competition for deposits remains intense,” Narayanan said. 

She added that banks’ increasing reliance on bulk deposits and other higher-cost funding sources is likely to push deposit costs higher. 

The report noted that treasury income, which had received a boost in the first half of the previous fiscal due to falling bond yields, is likely to normalise this year, leading to a decline in non-interest income by 5-10 basis points from last year’s level of 1.2%. 

However, fee and commission income is expected to remain healthy, supported by steady credit growth. 

Credit costs remained at a decade-low of around 0.4% last fiscal, helping maintain overall profitability despite moderation in margins. 

Vani Ojasvi, Associate Director at Crisil Ratings, said provisions could increase modestly this fiscal, though they are expected to remain below 0.5%. 

“Banks are likely to continue making proactive provisions ahead of the implementation of the ECL framework. Although the norms come into effect from April 1, 2027, and permit a phased transition, some banks have already started advancing provisions,” Ojasvi said. 

The report added that while tensions in West Asia could strain cash flows for some borrowers, particularly micro, small and medium enterprises (MSMEs), government support measures such as ECLGS 5.0 are expected to limit the impact on banks’ credit costs. 

Operating expenditure is expected to remain largely stable, although implementation of new labour codes could result in a marginal increase in costs once detailed guidelines are issued. 

According to the report, in the event of a prolonged conflict in West Asia leading to higher inflation and repo rate hikes by the Reserve Bank of India (RBI), banks’ NIMs may improve in the near term. 

This is because floating-rate loans are repriced faster compared with deposits, most of which are on fixed rates and adjust with a lag, thereby providing sme support to profitability during periods of rising interest rates.