New Delhi [India], February 16 : Despite witnessing tough conditions in the third quarter, loan growth will improve from the second half of Financial Year (FY) 2026, driven by a recovery in the unsecured segment and a gradual pickup in private capital expenditure (capex), according to a report by Mirae Asset Sharekhan.
The report added that the expectations are supported by better liquidity and rate cuts by the Reserve Bank of India (RBI).
It added that shallow rate cut expectations should help support net interest margins (NIMs). Additionally, the report adds that the credit costs are anticipated to normalise as stress in the unsecured segment stabilises.
The third quarter of FY2025 has been challenging for the banking sector due to the higher credit costs, slower loan and deposit growth, and pressure on NIMs.
Private banks in the third quarter reported muted earnings growth mainly led by weak operating performance and a steady rise in credit cost, while Public Sector Banks (PSBs) reported healthy earnings growth, led by lower credit costs, offsetting weak operating performance, the report mentions.
Higher credit cost was on account of the unsecured segment, while the lower share of unsecured loans for PSU banks supported earnings, according to the report.
Net interest income (NII), the difference between a bank's interest income and its interest expenses, saw growth that was weak, driven by lower NIM and moderation in credit growth.
PSU banks saw higher pressure on NIM, while private banks reported marginally lower NIMs q-o-q.
PSU banks saw better earnings growth than private banks, led by lower credit costs under their coverage, the report added.
Most private banks (barring HDFCB and ICICIB) saw a steady rise in credit cost, as asset quality in the unsecured segment (credit cards and MFI) worsened further in Q3FY2025.
The unsecured retail segment continues to face elevated delinquencies, impacting earnings and return ratios.
However, the report adds that the asset-quality deterioration remains concentrated in mid- and small-sized banks, with the market largely pricing in these concerns.
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