India is on track to remain the fastest growing economy among the G-20 countries in the coming financial year. According to a recent report by Moody’s Ratings, the country’s real GDP is expected to grow by 6.4% in the financial year 2026-27. The brokerage also predicted that over the next 12-18 months, the banking sector will remain stable thanks to this supportive economic environment.According to Moody’s the banks will be able to maintain stable and resilient performance supported by solid asset quality, strong capital, healthy profitability, adequate liquidity and government support.
Here are some of the major factors for banking growth in the country:
Improvement in asset quality: Asset quality is expected to remain broadly stable, with the systemwide non-performing loan (NPL) ratio remaining at a low level of 2% to 2.5%. Corporate loans in particular are likely to continue to perform well. According to Moody’s, low NPL levels are supported by stable economic growth and relatively low borrower leverage. Moreover, corporate asset quality also remains strong. Loan Quality: The quality of retail and MSME loans should remain stable, although results “may vary somewhat between lenders depending on underwriting standards and target borrower groups.”Macroeconomic environment: The brokerage said structural steps including rationalization of goods and services tax and cut in income tax should boost domestic consumption. It said monetary policy is likely to remain stable with supportive financial conditions. Moody’s said that following the trade agreement between India and the United States in February 2026, operating conditions for export-oriented micro, small and medium enterprises are likely to gradually improve, reducing the likelihood of additional stress.Strong Capitals: Capital levels are expected to remain stable. Internal accruals are expected to match capital consumption and comfortably fund credit expansion of 11% to 13%, the ratio of which is already well above the regulatory minimum.Profit: Earnings performance is unlikely to see sharp fluctuations. Moody’s expects returns on assets to be around 1.2% to 1.3%. The brokerage expects net interest margins to rise gradually as banks incorporate the 2025 rate cuts into deposit rates.Loan-loss provision: Moody’s expects loan-loss provisions to moderate after rising from historically low levels. However, floating provisions will increase as banks prepare for the transition to the IFRS 9 expected credit loss (ECL) framework. Loans and deposits are projected to grow together, keeping the systemwide loan-to-deposit ratio near 80%.Funding: In terms of resources, the rating brokerage believes credit and deposit growth will move broadly together, leaving the loan-to-deposit ratio close to 80%. Liquidity should remain adequate within the prevailing regulatory norms.Government Assistance: Moody’s also pointed to the state’s continued support. It expects the government to provide a high level of support to public sector banks, while the extent of support for private lenders will depend on their systemic importance.However, one challenge identified in the report is the battle for deposits as raising funds may prove difficult, especially in low-cost current and savings accounts, amid increasing competition.
