“A strong operating environment, driven by India’s robust economic growth, will support the sector’s solid fundamentals over the next 12-18 months,” the global rating company said.
As of January 30, the banking, financial services and insurance (BFSI) sector is the biggest constituent of the Nifty 50 by weighting-at about 37.1%.
Moody’s expects the banking sector profitability to remain stable with the system-wide return on assets (ROA) to rise to 1.2-1.3% in fiscal 2026-27 from 1.2% in the first half of fiscal 2025-26. Banks’ net interest margin is likely to see a gradual widening as the impact of deposit rate cuts comes with a lag.
The rating company projected the sectoral loan growth at 11-13% in fiscal 2026-27 in tandem with deposits, and hence, the system-wide credit-deposit ratio to remain around 80%.
“However, banks will face difficulty with deposit mobilisation amid heightened competition, particularly as growth in low-cost current account and savings account (CASA) deposits continues to be modest despite the narrowing interest rate gap with term deposits,” it added.
Indian banks are well capitalised while the adoption of the expected credit loss (ECL) framework, which will take effect gradually over four years from April 2027, will lead to moderate reductions in capital ratios by 50 basis points – 75 basis points.”The internal capital generation by banks will be sufficient to cover loan growth,” it added.
One basis point is a hundredth of a percentage point.
Quality Assets
“Strong economic growth will support banks’ asset quality. The quality of retail loans will be stable, particularly in the prime borrower segment, although it will diverge to some extent among lenders based on underwriting standards and target borrower groups,” Moody’s said.