PSBs' loan growth to outpace private banks in FY26: Fitch Ratings

The loan book of public sector banks (PSBs) will continue to swell faster this financial year than that of private peers, which are grappling with asset quality pressures in unsecured portfolios and elevated loan deposit ratios (LDRs), rating agency Fitch said on Monday.

 

PSB’s loan book is estimated to grow at 12 to 13 per cent, while private lenders will expand their portfolio by about 10 per cent in the financial year 2026 (FY26), Saswata Guha, senior director, Banks, Fitch Ratings said.

 

PSBs’ loans grew by 12.4 per cent while private peers lagged with 7.5 per cent in FY25. 

 

Fitch, in a statement said, the sector loan growth was 10.6 per cent in FY25, the slowest since FY21, reflecting reduced lending to non-bank financial institutions and unsecured retail customers amid tighter regulatory scrutiny and funding conditions. 

 

“We expect sector loan growth to rebound to 12 to 13 per cent in FY26 on accommodative monetary policy and easing funding conditions. However, improved deposit mobilisation will be needed to preserve rated banks’ nearly 120 basis points (bps) improvement in LDRs in FY25, as deposit growth converged with -- or in some cases exceeded -- lending growth,” it added.

 

Referring to financial profile, Fitch observed the sector reported improved asset quality, stronger capital buffers and stable profitability despite the slowest sector loan growth in four years. 

 

Banks can sustain steady performance across most credit metrics in FY26, except for earnings due to cyclical pressures on margins and credit costs.

 

The sector’s impaired-loan ratio fell by about 60bp to 2.2 per cent in FY25. Although write-offs and recoveries were lower than in previous years due to a shrinking stock of legacy bad loans, they remained sufficient to largely offset bad loan additions. The private banks reported higher bad loan formation, though all banks saw net improvements. Fitch-rated banks maintained 80 per cent loan loss coverage.

 

The impaired-loan ratios and credit costs for most banks have bottomed. Some banks may still improve given scope for write-offs in legacy bad loans that will further reduce the bad loan stock. This and higher loan growth could reduce the sector’s impaired-loan ratio by 20bp in FY26, it added.