New Delhi [India], March 31 (ANI): Indian banks are expected to register loan growth of 12-14 per cent in the financial year 2025-26 (FY26), driven by an increase in deposit inflows, according to a report by Ambit Capital Research.

The report highlighted that the banking sector has started seeing some relief in loan-to-deposit ratios (LDRs) after facing challenges related to liquidity and asset quality. This improvement is mainly due to a gradual rise in deposits and a slower pace of loan disbursements.

Experts believe that this trend will be reflected in the period-end LDR as well. Additionally, easing liquidity conditions and a possible reduction in risk weights on unsecured retail loans are expected to support steady loan growth.

It said 'With easing liquidity and probable easing of risk weights on unsecured retail, we expect sector loan growth to stay at 12-14 per cent in FY26E'.

Despite improving liquidity, the report mentioned that the banks are likely to face pressure on their net interest margins (NIMs) in FY26. The reason for this is high deposit costs and falling yields, which could lead to a decline of 5-20 basis points for most lenders.

However, the impact will vary depending on a bank's portfolio mix and liability structure. Banks with a higher share of fixed-rate loans will likely manage their margins better than those with a greater proportion of variable-rate loans.

The report also pointed out a rise in non-performing assets (NPAs) in the retail sector due to an increase in unsecured retail loans such as personal loans and credit cards. While banks had maintained strong asset quality post-COVID, the growing volume of unsecured loans has led to higher retail defaults in recent years.

To address this issue, banks have started consolidating their retail lending portfolios, which will help them identify and manage balance sheet stress by the first half of FY26.

Although credit costs are expected to rise in FY26, banks have built strong provisions ranging from 0.7-1.7 per cent of total loans. The provision coverage ratio (PCR) remains at around 70%, which should provide some cushion against potential defaults.

With liquidity conditions improving and possible regulatory support, such as a reduction in risk weights on unsecured retail loans, the banking sector is expected to grow steadily. However, banks will need to manage deposit costs, margin pressures, and asset quality challenges to maintain financial stability in FY26. (ANI)