Cautious confidence: Amid uncertainty, banks seek to steer with stability

Even as banks boast healthy books, concerns remain across the financial landscape. Raghu Mohan and Abhijit Lele explain why work is not yet complete

As we step into 2026, the biggest imponderable is the tariff imposed by the United States. To add to woes is US President Donald Trump’s latest threat to slap 25 per cent duty on any country that continues to do business with Iran, making it a looming threat for domestic businesses, and by extension, banks’ books. This comes even as lenders’ financials are in a sweet spot — be it capital buffers, or return on equity — and bad loans are well under control. 

“The tariff hike has affected the exports of micro, small and medium enterprises (MSMEs), but they were able to soften the impact by diversifying the market and government’s support,” said Ashok Chandra, managing director (MD) and chief executive officer (CEO), Punjab National Bank. Sectors like textiles, gems and jewellery, marine products, and footwears were hit, but they have been able to recoup with government support, and diversify their orders to other countries. “Though an uncertain global, and economic trade environment continues to pose risk, MSMEs have not seen any asset quality risk for banks,” he added. 

 

What of the wider India Inc? Bank of India MD and CEO, Rajneesh Karnatak, is of the opinion that project financing will gather momentum, and loan offtake (term loans) to infrastructure, and manufacturing will be better in calendar year 2026 (CY26), than 2025. But, working capital loans may not see much increase as companies are tapping their own resources for business requirements. 

As for the economy, Madan Sabnavis, chief economist, Bank of Baroda is of the view, it will maintain the momentum gained in financial year 2026 (FY26) in FY27, with growth in the 7-7.5 per cent range. As per the first advance estimates of National Income, released by the National Statistical Organisation, India’s real GDP and gross value added (GVA) growth for FY26 are projected at 7.4 per cent and 7.3 per cent, respectively. This will be driven by two factors — pick up in consumption sustaining over a longer period of time, and private investment becoming gradually more broad-based. “Companies are also expected to do better, especially in the consumption goods space, with sustained demand resulting in improvement in earnings. The inflation outlook would be in the region of 4-4.5 per cent, which means that the rate cycle involving reductions is virtually over,” he said. By and large, the rupee should maintain its level, as the dollar remains weak in 2026, and deprecation of 3-4 per cent could be expected. 

A pressure point for banks will be on the deposits front. The ability to raise deposits is an issue which finds mention in the ‘Trend and Progress of Banking in India’ report for FY26 (T&P: FY26). “Going forward, banks will continue to face competition from non-bank sources in meeting the resource requirements of the commercial sector,” it noted. As of the fortnight ended December 31, 2025, deposit inflows stood at ₹6.5 trillion, while credit outflows were marginally higher at ₹6.7 trillion, indicating that credit demand slightly outpaced deposit mobilisation during the period, keeping the credit-deposit ratio (CD ratio) at an all-time elevated level of 81.7 per cent. 

According to Karnatak, the colour of deposit mobilisation has changed. “There is a challenge in mobilising low cost savings, and current account deposits as part of money is moving to other asset classes. Hence, the margins are likely to remain under pressure in the early part of the year for the sector,” he said. Many banks are tapping short term funds from institutions. While rates have not hardened at the short end, compared to long-term paper, CD ratio is elevated, he added. 

Chandra concurred. “This situation is likely to be challenging as the low interest regime has diminished the attractiveness of bank deposits vis à vis alternative investments, like post office deposits, mutual funds etc.” Banks will have to “innovate new methods and products to attract deposits, along with enhancing customer service”, he said. 

An interesting variable to watch out for is Mint Road’s shift to a risk based deposit insurance premium (from the existing flat rate premium system), with the existing flat rate premium of 12 paise per ₹100 of assessable deposits per annum serving as the ceiling. The better rated banks will pay lower, and the framework seeks to incentivise sound risk management by linking premium rates to the risk profile of banks, and thereby enhancing the resilience of the banking system. Whether the rating of individual banks is to be made public is unknown, but insurance payouts to the Deposit Insurance and Credit Guarantee Corporation can give an indication of the same, and can affect a bank’s ability to raise deposits. 

Then, you have sectoral worries. Microfinance institutions (MFIs) are in a tight spot: the sixth consecutive quarterly southward movement in their portfolio to ₹1.31 trillion as of September 2025, from ₹1.6 trillion in March 2024, with about half a million customers getting pushed out of the ambit of these entities, according to data from Microfinance Institutions Network. The slowdown in disbursement of micro-loans is adversely affecting the cash flow for borrowers at the bottom of the economic pyramid. “This is expected to have an impact on some of the other retail loans too, including small-ticket loans against property, business loans, used vehicle loans etc., which form part of the same ecosystem,” stated A M Karthik, senior vice-president and co-group head (financial sector ratings), Icra. Access to gold loans is currently providing some relief to this segment, supporting their near-term cash flows. 

What of non-banking financial companies (NBFCs)? The credit extended by NBFCs has been rising over the years, underscoring their growing importance in financial intermediation. It increased to 14.6 per cent of gross domestic product in FY25 from 13.5 per cent in FY24, according to the latest RBI data. During this period, NBFCs’ credit as a share of outstanding credit of scheduled commercial banks increased to 25.3 per cent, against 23.6 per cent the previous year. 

According to Shachindra Nath, founder, UGRO Capital, FY27 should be a constructive year for NBFCs, with MSMEs and priority-sector lending driving credit growth. That said, he felt NBFCs that are structurally focused on priority sectors, and MSMEs require differentiated regulatory dispensation to scale responsibly. “Enhanced liquidity access, stable refinancing lines, and deeper domestic capital support are essential to sustain credit dissemination to underserved segments,” he said. With appropriate policy support, NBFCs can complement banks by delivering last-mile credit, through specialised underwriting and local distribution. 

On the regulatory topography, regulated entities will have to brace for a new regime. The setting up of the Regulatory Review Cell (RRC) by Mint Road, to be housed in its Department of Regulation (effective October 1, 2025), is a pointer to this. Its mandate? To ensure regulations are subject to a comprehensive and systematic internal review every five-seven years. Another theme for REs will continue to be around governance — be it housekeeping, the role of independent directors, or business models.

 

Look out for

• US President Donald Trump’s latest threat to slap 25 per cent duty on any country that continues to do business with Iran
• Stress in the MSMEs and microfinance sectors
• A pressure point for banks will be ability to raise deposits, as flagged by the ‘Trend and Progress of Banking in India’ report for FY26
• The credit-deposit ratio is at an all-time high of 81.7 per cent
• On the regulatory topography, regulated entities will have to brace for a new regime