Indian Banks Poised to Manage Rising Loan Risks and Sustain Earnings: S&P Report

Indian banks are in a strong position to handle rising credit costs and global economic challenges, according to S&P Global Ratings. The rating agency expects modest softening in asset quality but anticipates robust credit growth from the second half of fiscal 2026, supported by regulatory support, tax reliefs, and improving corporate financial health.

Banks Can Absorb Higher Credit Costs

S&P projects that Indian banks will face an increase of 80–90 basis points in credit costs over the next two years, primarily due to stress in unsecured retail loans, microfinance, and small business lending. 

Despite this, banks are expected to maintain pre-provision operating profits of 3.6–3.7% of loans, keeping their earnings comparable to or better than many regional peers.

Credit Growth to Recover in FY26

The report anticipates a revival in credit growth from the second half of fiscal 2026, driven by GST rate cuts, income tax relief, and potential regulatory easing.

Overall credit growth is projected at 11.5–12.5% over FY26 and FY27, signalling sustained lending momentum.

Asset Quality to Soften Moderately

While overall asset quality is expected to remain stable, bad loans may rise to 3.0–3.5%, reflecting some stress in retail and SME segments. 

New non-performing asset (NPA) formation in corporate lending is projected at 1.1% annually, while the total new NPA formation is likely to be higher at 1.7–1.8%, due to slippages in retail and SME portfolios.

Corporate Resilience Supports Banking Stability

S&P’s analysis of more than 2,000 Indian corporates using Asia-Pacific default rates indicates that banks can comfortably absorb potential loan slippages. 

Improving corporate financial health adds a layer of protection for lenders, making them well-prepared for growth despite external shocks.

Key Factors Behind Bank Resilience

Several elements contribute to the strength of Indian banks:

• Low exposure to vulnerable sectors: Tariff-affected industries like textiles and gems/jewelry make up just 2% of total loans.
• Secured lending focus: Strong preference for secured retail loans reduces risk.
• Limited impact from rupee depreciation: Only 5% of external borrowings are exposed, and 75% of corporate ECBs are hedged.
• Corporate deleveraging: Companies are reducing leverage, further limiting potential defaults.

Funding Challenges and Investment Financing

Banks may face constraints in financing private investment due to domestic savings shifting toward mutual funds, equities, and real estate. As deposit growth slows, lenders are likely to rely more on wholesale domestic and international debt to support lending activities.

Read More: Diwali Bank Holidays and Stock Market Holidays 2025.

Conclusion

Indian banks appear well-prepared to navigate global uncertainties, rising credit costs, and market pressures. Strong corporate balance sheets, conservative lending practices, and strategic sector exposure provide resilience. 

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.

Investments in the securities market are subject to market risks, read all the related documents carefully before investing.