Banks set for Q1 credit boost, but margin pressure may spoil the party
Banks’ asset quality is expected to have remained stable in the April-June quarter, but analysts say the possible second-order impact of the West Asia conflict, especially on micro, small and medium enterprises, will need to be closely watched.
- Jul 13, 2026,
- Updated Jul 13, 2026 4:13 PM IST
India’s earnings season is well underway, and this week will see several top-tier private lenders, including HDFC Bank, ICICI Bank, Axis Bank and Kotak, along with a few mid-sized peers, announce their quarterly results.
Even as the shadow of the West Asia conflict looms over corporate India, banks are expected to report strong revenue growth in the April-June quarter, aided by robust credit growth that continues to outpace deposit growth. However, net interest margins (NIMs) may remain flat or turn negative as elevated funding costs weigh, analysts said.
Recent Reserve Bank of India data showed that banking sector credit growth had risen to 17.7% by mid-June. Continued traction in lending to micro, small and medium enterprises (MSMEs), large industry and services has been among the key growth drivers. A rise in bond yields in the first quarter may also have led to a surge in corporate borrowings, according to Nitin Aggarwal, research analyst at Motilal Oswal Financial Services.
Analysts at Mirae Asset Sharekhan expect banks to report 17.3% year-on-year credit growth, with public sector banks likely to grow faster at 17.8%, compared with 16.7% for their private sector rivals.
“Higher working capital requirements and a shift by corporates from capital markets to banks have pushed overall non-retail loan growth,” the analysts said.
However, even as strong credit growth remains positive for banks, lenders continue to face challenges in raising funds as deposit growth falls behind. Mirae Asset Sharekhan analysts expect deposits to grow 13.2% year-on-year. “Deposit growth continues to trail loan growth, resulting in greater reliance on wholesale deposits. With competition for deposits still intense, banks continue to face challenges in mobilising low-cost deposits,” said Aggarwal of Motilal Oswal, who noted that system-wide deposit growth had been around 12% year-on-year.
This could weigh on margins for some lenders.
“We expect NIMs to remain under pressure as elevated funding costs continue to weigh on margins,” noted Bino Pathiparampil, Head of Research at Elara Capital.
“Commentary around deposit repricing, funding costs, liability mix and the NIM trajectory in FY27 will be key discussion points across management interactions,” he said.
Aggarwal expects top private sector banks to report a marginal decline in margins, while state-owned lenders are likely to report broadly stable margins, although in a narrow range.
Mirae Asset Sharekhan expects bank margins to remain largely flat in the April-June quarter, as downward pressure on yields is likely to be significantly mitigated by the lagged benefits of earlier term deposit rate reductions.
The special window announced by the Reserve Bank of India for raising FCNR(B) deposits could also help lenders mobilise deposits to some extent. According to State Bank of India’s research department, overall deposits in the banking system jumped by around Rs 7 lakh crore in the fortnight ended June 30, 2026, which was third highest fortnightly growth in 29 years. The surge may have been driven by a “potential jump in capital flows” through FCNR(B) deposits, external commercial borrowings and overseas foreign currency borrowings, it said.
Over the past few years, banks have largely cleaned up their books, leading to a reduction in non-performing assets (NPAs). Asset quality is likely to have remained steady in the first quarter as well.
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Unsecured segments such as personal loans and credit cards, which had raised concerns over rising stress last year, are showing some signs of normalisation, analysts said. According to Mirae Asset Sharekhan, early-bucket delinquencies in the microfinance industry (MFI) have also remained stable.
“Most banks have indicated that stress is easing in unsecured loans, while MFI stress is trending closer to normalisation,” said Motilal’s Aggarwal.
But, as we look ahead, there are a few things to monitor, say analysts. Notable to watch out would be potential impact of the ongoing crisis in West Asia, which could impact corporates, especially MSMEs.
“Stress in the MSME segment, particularly within the micro-ticket portfolio, will remain a key monitorable, given the potential second-order impact of the ongoing West Asia conflict and broader macro uncertainty,” said Pathiparampil.
The monsoon was weak in June, and while it picked up strongly in early July, it has again weakened in several areas. As such, El Nino conditions are expected to impact the monsoon season this year, and how that weighs agriculture, and in turn farm loans, will also have to be monitored.
India’s earnings season is well underway, and this week will see several top-tier private lenders, including HDFC Bank, ICICI Bank, Axis Bank and Kotak, along with a few mid-sized peers, announce their quarterly results.
Even as the shadow of the West Asia conflict looms over corporate India, banks are expected to report strong revenue growth in the April-June quarter, aided by robust credit growth that continues to outpace deposit growth. However, net interest margins (NIMs) may remain flat or turn negative as elevated funding costs weigh, analysts said.
Recent Reserve Bank of India data showed that banking sector credit growth had risen to 17.7% by mid-June. Continued traction in lending to micro, small and medium enterprises (MSMEs), large industry and services has been among the key growth drivers. A rise in bond yields in the first quarter may also have led to a surge in corporate borrowings, according to Nitin Aggarwal, research analyst at Motilal Oswal Financial Services.
Analysts at Mirae Asset Sharekhan expect banks to report 17.3% year-on-year credit growth, with public sector banks likely to grow faster at 17.8%, compared with 16.7% for their private sector rivals.
“Higher working capital requirements and a shift by corporates from capital markets to banks have pushed overall non-retail loan growth,” the analysts said.
However, even as strong credit growth remains positive for banks, lenders continue to face challenges in raising funds as deposit growth falls behind. Mirae Asset Sharekhan analysts expect deposits to grow 13.2% year-on-year. “Deposit growth continues to trail loan growth, resulting in greater reliance on wholesale deposits. With competition for deposits still intense, banks continue to face challenges in mobilising low-cost deposits,” said Aggarwal of Motilal Oswal, who noted that system-wide deposit growth had been around 12% year-on-year.
This could weigh on margins for some lenders.
“We expect NIMs to remain under pressure as elevated funding costs continue to weigh on margins,” noted Bino Pathiparampil, Head of Research at Elara Capital.
“Commentary around deposit repricing, funding costs, liability mix and the NIM trajectory in FY27 will be key discussion points across management interactions,” he said.
Aggarwal expects top private sector banks to report a marginal decline in margins, while state-owned lenders are likely to report broadly stable margins, although in a narrow range.
Mirae Asset Sharekhan expects bank margins to remain largely flat in the April-June quarter, as downward pressure on yields is likely to be significantly mitigated by the lagged benefits of earlier term deposit rate reductions.
The special window announced by the Reserve Bank of India for raising FCNR(B) deposits could also help lenders mobilise deposits to some extent. According to State Bank of India’s research department, overall deposits in the banking system jumped by around Rs 7 lakh crore in the fortnight ended June 30, 2026, which was third highest fortnightly growth in 29 years. The surge may have been driven by a “potential jump in capital flows” through FCNR(B) deposits, external commercial borrowings and overseas foreign currency borrowings, it said.
Over the past few years, banks have largely cleaned up their books, leading to a reduction in non-performing assets (NPAs). Asset quality is likely to have remained steady in the first quarter as well.
MUST READ | Looking for the best FD? These banks are offering up to 8.10% interest in July 2026
Unsecured segments such as personal loans and credit cards, which had raised concerns over rising stress last year, are showing some signs of normalisation, analysts said. According to Mirae Asset Sharekhan, early-bucket delinquencies in the microfinance industry (MFI) have also remained stable.
“Most banks have indicated that stress is easing in unsecured loans, while MFI stress is trending closer to normalisation,” said Motilal’s Aggarwal.
But, as we look ahead, there are a few things to monitor, say analysts. Notable to watch out would be potential impact of the ongoing crisis in West Asia, which could impact corporates, especially MSMEs.
“Stress in the MSME segment, particularly within the micro-ticket portfolio, will remain a key monitorable, given the potential second-order impact of the ongoing West Asia conflict and broader macro uncertainty,” said Pathiparampil.
The monsoon was weak in June, and while it picked up strongly in early July, it has again weakened in several areas. As such, El Nino conditions are expected to impact the monsoon season this year, and how that weighs agriculture, and in turn farm loans, will also have to be monitored.