Key Points

New Delhi [India] October 8 (ANI): India's banking sector is set for a phase of steady expansion even as global economic uncertainties and cautious lending temper the outlook, according to S&P Global Ratings. Credit growth is expected to recover to between 11.5 per cent and 12.5 per cent over the next two fiscal years, driven by fiscal incentives and structural resilience in the domestic economy.

S&P said in its latest report titled "Indian Banks: Primed for Growth" that the sector's fundamentals remain strong, supported by lower corporate leverage, healthy deposits, and improved asset quality, despite global headwinds such as tariff shocks, currency pressures, and possible rate cuts.

Financial resilience among Indian corporates is improving. "We applied Asia-Pacific corporate default rates to CreditModel scores to more than 2,000 Indian companies. Our scenario analysis suggests that Indian banks can easily absorb potential slippages, making them primed for growth," said S&P Global Ratings credit analyst Geeta Chugh.

The report adds that the banking industry's growth revival is likely to be underpinned by tax relief measures, GST rate cuts, and potential regulatory easing, though lending to small businesses and unsecured retail segments could see moderation.

Banks will face limited direct impact from depreciating rupee, with external borrowings at just 5 per cent. Indirect impact is also minimal because 75 per cent of corporate external commercial borrowings are hedged.

"A sharp credit revival--though we don't expect one in the next two years--would stretch banks' funding profiles and force them to rely on alternative funding sources. Cuts to the cash reserve ratio offer relief. While Indian banks' loan-to-deposit ratios are competitive regionally, India's reserve requirements exceed those of many peers," said Chugh.

Indian banks exposure to the tariff-hit textiles and gems and jewellery sectors stands at just 2 per cent of total loans, as of Aug. 22, 2025. These sectors are most vulnerable due to high leverage and low margins said the report.

Indian banks are likely to deliver above-average profitability over the next two years even as margins soften and credit costs normalize. "We expect earnings to moderate but remain above long-term averages." added Chugh

According to the report's projections, India's real GDP growth is set to remain around 6.5 to 7 per cent through FY28, supporting credit expansion. However, net interest margins (NIM) may compress slightly to about 3.4 per cent, reflecting the impact of potential policy rate cuts and competition for deposits.

The study cautioned that easy funding conditions and lighter covenants could tempt corporates to take on more leverage, particularly in emerging sectors such as renewables, semiconductors, and data centers, areas with higher execution and technology risks

The report highlights that while deposit growth remains steady at about 11 per cent a sustained credit upswing may require alternative funding sources.

- ANI