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Increase in Bad Assets to Impact Indian Banks’ Profitability in FY26

While the RBI’s regulations under former Governor Shaktikanta Das have strengthened the sector, analysts speculate that norms may become less stringent under Governor Sanjay Malhotra
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Indian banks are expected to face profitability challenges in FY26 due to rising bad assets and higher credit costs, according to India Ratings and Research. The agency noted that FY24 marked the peak of banking profits, with FY25 being an “inflexion point” for profitability.

Mr. Karan Gupta, the agency’s Head and Director of Financial Institutions, stated that slippages and credit costs are likely to rise in FY26, impacting banks’ performance. A significant portion of the stress is expected to come from unsecured retail loans, though Gupta emphasized that this is manageable and unlikely to pose systemic risks.

The unsecured retail segment below Rs. 50,000 constitutes only 0.4% of banking credit, while loans with interest rates above 11% account for 3.6% of advances. Additionally, credit growth projections for FY25 have been revised down to 13-13.5% from 15%, with core interest income expected to decline.

Banks’ net interest margins (NIMs) are projected to narrow by 0.10% due to higher slippages, past rate hike transmissions, and accounting changes. Regulatory challenges, including new norms on project finance, liquidity coverage ratios, and the transition to an expected credit loss framework, may also weigh on the sector.

While the Reserve Bank of India’s regulations under former Governor Shaktikanta Das have strengthened the sector, analysts speculate that norms may become less stringent under new Governor Sanjay Malhotra.

India Ratings has maintained its ratings for banks and financial companies but highlighted stress in certain asset segments, including microfinance, where borrower debt has outpaced wage growth.


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