New Delhi, February 10: India’s banking sector is entering 2026 in its strongest position yet. Robust economic growth, improved asset quality, and substantial capital reserves will enable Indian banks to tackle upcoming challenges effectively. International rating agency Moody’s has expressed a positive outlook on India’s banking system, maintaining a ‘Stable Outlook’. The agency noted that the operating environment for banks will remain favorable over the next 12 to 18 months, supported by policy stability and domestic demand.
Moody’s projects that India’s real GDP growth rate will reach 6.4% in the fiscal year 2027, the highest among G20 nations. This growth will assist banks in expanding their lending and balance sheets. The agency emphasizes that the country’s strong economic position is laying a solid foundation for the banking sector.
According to the report, the loan growth rate across the banking system is expected to rise to between 11% and 13% in fiscal year 2027, up from 10.6% in fiscal year 2026. An increase in consumer spending and supportive government policies will enhance loan demand. However, some small and medium enterprises related to exports may face pressure. Nevertheless, Moody’s believes that banks have already made sufficient provisions to manage potential losses.
Moody’s anticipates that the non-performing loan (NPL) ratio will remain within the range of 2% to 2.5%. The quality of retail loans is expected to remain stable, particularly among reliable customers. Additionally, the strong financial health and improved profitability of large corporations will help maintain the quality of corporate loans.
The agency also expects a gradual improvement in bank profitability in the coming period. Interest rates on deposits are likely to decrease over time, while lending rates may remain stable for now. The impact of the interest rate cuts made by the Reserve Bank of India in 2025 will positively affect banks’ income, potentially increasing total profits in fiscal year 2027.
Moody’s stated that the capital position of Indian banks remains strong. Due to previously raised capital and internal earnings, banks currently do not require significant new capital. However, new international accounting standards and banking regulations will be implemented from April 2027, which may slightly affect capital ratios, though the overall impact is expected to be limited.
The report also indicates that banks’ funding and liquidity positions will remain stable. Loan and deposit growth are expected to be nearly equal. Furthermore, Moody’s reiterated that government banks will continue to receive strong support from the government, ensuring that India’s banking system remains secure and stable despite global risks.
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DBP/
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