Indian banks' profitability is expected to moderate in FY26, following an inflexion point in FY25, largely due to delinquencies stemming from over-leveraging in unsecured assets and rising unsecured credit costs, Business Standard has reported, citing an analysis by India Ratings.

According to the rating agency, the strong financial improvements observed between FY21 and FY24 likely peaked and will plateau in FY25 before declining further in FY26. The report highlights increasing delinquencies in specific retail segments, including personal loans, credit cards and microfinance. While the gross non-performing asset (GNPA) ratio for retail loans remained stable at 1.2% during H1 FY25, the special mention account (SMA) ratio in retail fell to 2.5% from 3% a year earlier.

Unsecured lending showed a slightly higher GNPA ratio of 1.7%. Analysts noted that delinquencies in this segment were influenced by borrowers from self-employed backgrounds, those with informal or semi-formal income sources, and younger individuals.

Credit growth for banks is projected to slow to around 13–13.5% in FY25 and FY26, driven by reduced lending to non-banking financial companies (NBFCs) and the retail sector, even as corporate loan demand shows signs of recovery. Deposit growth is expected to hover at 12–13% for FY26, with banks facing greater competition for low-cost current account savings accounts (CASA).

NBFCs are also expected to witness moderated loan growth, likely slowing to 18.5% in FY26, as these institutions adjust their business strategies to maintain risk-adjusted profitability.

India Ratings revised its outlook for the microfinance sector from neutral to deteriorating, citing borrower over-leveraging, reduced centre attendance, high attrition rates at branch levels, and rising fraud incidents. These factors are contributing to higher operational and credit costs in the medium term, the report stated.

Karan Gupta, Head and Director of Financial Institutions at India Ratings said that the sector outlook on MFIs has been downgraded to deteriorating from neutral. However, the rating outlook for FY26 remains stable, underpinned by adequate capitalisation, liquidity buffers, and sufficient pre-provision operating profit (PPoP) margins to absorb the current asset quality downturn. Recovery is anticipated in the second half of FY26, he added.