NIM stabilisation, asset quality, disciplined growth key for banks in 2026

After a year of margin pressure and muted growth, banks head into 2026 expecting NIM stabilisation, benign asset quality and a gradual revival in credit, aided by rate cuts and foreign inflows

The year gone by was marked by large foreign investments 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 and deposit growth.

 

For 2026, however, the outlook is more optimistic, with expectations of a revival in credit growth — visible toward the end of last year — easing margin pressures, benign asset quality conditions, and the likelihood of increased investment into the sector.

 

In 2025, domestic lenders attracted over $6 billion in foreign investments, while the stake sale of another bank — IDBI Bank — is in its final phase and is expected to be concluded by the end of the financial year. A favourable regulatory environment, cleaner bank balance sheets, India’s growth potential, and strong investor conviction in the long-term compounding prospects of mid-tier banks have driven this investment momentum, which is expected to continue in 2026.

 

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 (MPC) since February 2025, as deposit rates tend to adjust more slowly than lending rates.

 

Data show that NIMs of private sector banks declined by 15 bps to 3.87 per cent in Q2FY26 from 4.02 per cent in Q4FY25, while those of state-owned banks fell 10 bps to 2.71 per cent from 2.81 per cent over the same period. Margin compression was sharper in Q1FY26, while Q2 saw better-than-expected NIM performance, even after absorbing the full impact of a 50-bps repo rate cut, aided by meaningful reductions in savings account rates. Going forward, with the rate-cut cycle likely behind, banks’ margins are expected to stabilise.

 

Asset quality remained broadly stable in 2025, barring pockets of stress in the microfinance segment. Credit growth, which was subdued for much of the year, showed signs of revival toward the end of 2025, supported by GST rationalisation and RBI rate cuts.

 

According to Harsh Dugar, executive director, Federal Bank, the pressure on banks’ NIMs — caused by faster repricing of assets compared with liabilities — is likely to ease in 2026. The sector is not expected to face any major asset quality concerns, while stress in the microfinance segment is likely to stabilise amid early signs of improvement, he said.

 

“With GDP 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 (FPIs), who have been net sellers of both equity and debt, may also return to Indian markets if trade-related uncertainties ease,” Dugar added.

 

Echoing similar 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 inflection point. As of September 2025, gross non-performing assets (NPAs) declined to 2.05 per cent, the lowest level in nearly two decades, while net NPAs moderated to 0.48 per cent.

 

“System-wide capital adequacy strengthened to 17.24 per cent, materially enhancing resilience and growth capacity. These outcomes reflect the cumulative impact of reforms such as the Asset Quality Review, the Insolvency and Bankruptcy Code, and stronger recovery frameworks,” Anand said. He added that system credit growth held steady at 11–12 per cent, even as deposit growth eased to around 10 per cent.

 

“This gap underscores the critical need for high-quality funding, disciplined pricing, and sound underwriting practices, supported by a healthier balance sheet environment,” he said.

 

Going ahead, Anand said the focus is shifting from consolidation to driving growth through disciplined execution, robust deposit mobilisation, and risk-calibrated expansion.