2026 outlook for banking sector: NIMs stable, liquidity challenge looms

After margin pressure and muted credit in 2025, banks enter 2026 with hopes of credit revival, stable asset quality and more investments, though funding and deposits remain key risks

The past year was marked by large foreign investment in the banking sector, policy rate cuts by the Reserve Bank of India (RBI) that compressed banks’ margins, stress in the microfinance segment, and muted credit growth. For 2026, however, the outlook appears more optimistic, with expectations of a revival in credit growth — visible towards the end of last year — easing margin pressures, benign asset quality conditions, and a likely increase in sector investments, experts said.

 

One potential concern is a slowdown in deposit growth due to lower interest rates on such products and the rising appeal of alternative asset classes. This could push banks to rely more on capital markets to support credit growth, experts added, observing that liquidity in the system will remain a key monitorable. 

In 2025, domestic lenders attracted over $6 billion in foreign investments, driven by a favourable regulatory environment, cleaner bank balance sheets, and India’s growth potential. This investment momentum is expected to continue into 2026. Meanwhile, net interest margins (NIMs) of scheduled commercial banks came under pressure following a cumulative 125-basis-point policy rate cut by the RBI’s monetary policy committee from February 2025, as deposit rates tend to adjust more slowly than lending rates. 

Looking ahead, with the rate-cut cycle likely behind us, banks’ margins are expected to stabilise and gradually move upward, experts said.

 

According to Harsh Dugar, executive director at Federal Bank, pressure on banks’ NIMs is likely to ease in 2026. The sector is not expected to face major asset quality concerns, while stress in the microfinance segment is likely to stabilise amid early signs of improvement.

 

“With gross domestic product growth expected to remain healthy, credit and deposit growth are also likely to stay strong this year. That said, the global outlook remains a key risk. A pickup in exports — potentially supported by the conclusion of trade agreements — could provide a meaningful boost to the economy. Foreign portfolio investors, who have been net sellers of both equity and debt, may also return to Indian markets if trade-related uncertainties ease,” Dugar added.

 

Echoing this optimism, Rajiv Anand, managing director and chief executive officer of IndusInd Bank, said 2025 marked another resilient year for the banking sector, which remains at a structural inflexion point. Going forward, Anand said the focus is shifting from consolidation to driving growth through disciplined execution, robust deposit mobilisation, and risk-calibrated expansion.

 

Asset quality remained broadly stable in 2025, except for pockets of stress in the microfinance segment. Credit growth, subdued for much of the year, showed signs of revival towards the end of 2025, supported by goods and services tax rationalisation and RBI rate cuts. According to the latest data, credit growth stood at 12 per cent, while deposit growth was 9.4 per cent.

 

Anil Gupta, senior vice-president and co-head of financial sector ratings at Icra, said banks’ NIMs may face some pressure in the first quarter but would stabilise thereafter as the rate-cut cycle nears its end.

 

“We are also not expecting major surprises on asset quality. But system liquidity and funding will remain key areas to monitor. While the RBI has been infusing liquidity through open market operations (OMOs) and foreign exchange (forex) swaps, the credit-deposit ratio is at an all-time high. The main challenge for banks will be funding credit growth while keeping funding costs low in a low-rate environment. OMOs and forex swaps have their limitations over the long term,” he said, adding that funding will be the primary challenge for banks in 2026.

 

The RBI recently announced ₹2 trillion of OMOs and $10 billion in forex buy/sell swaps to infuse liquidity into the system, which was in deficit following forex interventions by the central bank.

 

Abizer Diwanji, founder of NeoStrat Advisors LLP, said that with so much capital entering the sector, risk management will be the central challenge. “If corporate lending does not pick up, the energy for lending in India will become very scarce. Therefore, we need to be cautious about where excess capital is deployed. On the retail side, growth will continue, but gaps remain. If the economy does not generate actual job creation, retail lending could turn into a bubble,” he cautioned.

 

He added that on the investment side, bank deposits — especially savings accounts — are losing appeal as money increasingly flows toward capital markets or fixed deposits. This trend raises the overall cost of capital, making lending more selective. As investors chase higher yields, banks may have no choice but to maintain elevated borrowing costs. 

Banking outlook

 

• Banks enter 2026 on a stronger footing
• NIM pressure easing as rate cuts end
• Margins are likely to stabilise
• Liquidity is a key risk to watch
• The main challenge for banks will be funding credit growth
• RBI support helpful but has limitation over the long term