Indian Banks' earnings growth forecast halved amid economic caution and high deposit costs
Mumbai: The pace of earnings growth could halve at Indian banks, which together make up about a third of the Nifty's weighting, with experts attributing the foreign funds-heavy sector's deceleration in FY26 to a circumspect economy, narrower core profits, muted credit demand, and persistently high deposit costs.
ADVERTISEMENT "The banking sector's earnings growth has witnessed successive moderation-from 39.3% in FY23 to 12.8% in FY25," said Nitin Aggarwal, head, BFSI, Motilal Oswal Securities. "In FY26, we estimate earnings growth to moderate to 6.5%, with the first half being more muted. We also estimate FY27 earnings growth to recover to 16.1%."
Some analysts have pencilled in aggregate growth at 2%, with policy rates dropping a full percentage point in four months, prompting an immediately lower pricing for a majority of loans tied to the external gauge. Most analysts, however, expect earnings growth in the lending sector to rebound in FY27.
"We expect earnings growth for our covered banks to remain subdued at 2% on year in FY26 and improve to 16% on year in FY27," Ankit Bihani, associate, Nomura Financial Advisory and Securities (India), said. "Earnings cuts have been sharper for MFI lenders like Bandhan and IndusInd Bank. FY26-27 EPS cuts for large private banks have been 0-8% and PSU banks 6-10%, led by moderation of NIMs amid the rate cut cycle."The recent deceleration in credit growth and the downgrade in earnings growth is the result of RBI's calibrated actions to rein in unsecured consumer credit which has triggered a slowdown in personal and services credit, which together account for over 70% of the total growth slowdown. Credit growth has dropped sharply from 16% a year ago to under 10% now.While bank credit to NBFCs, down to 3% on year, has driven much of the decline in services credit, a drop in unsecured credit growth has also weighed on the expansion in personal loans. Tight liquidity in the system, due to persistent forex outflows, continued well into March 2025, further constraining banks' lending capacity.
ADVERTISEMENT A weakened risk appetite among banks, driven by emerging asset quality concerns in microfinance and credit card book, prompted banks to pull back on credit growth toward the latter half of FY25. "We forecast a rebound to 13% in FY26, around 100 bps ahead of consensus, supported by a favorable base, improving demand from consumers, NBFCs, and the agri segment, and aided by both rate cuts, liquidity surplus, CRR easing and fiscal measures like budget tax cut stimuli," said Pranav Gundlapalle, head of India financials at Bernstein.
(You can now subscribe to our ETMarkets WhatsApp channel)
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Time of India
26 minutes ago
- Time of India
VCs love start-ups—But why are they turning away from MSMEs?
Entrepreneurs in India's micro, small and medium enterprises ( MSME ) sector have been facing significant hurdles in accessing capital from traditional banking and institutional sources, primarily due to stringent eligibility criteria, high collateral demands, and complex application procedures. As a result, angel investors and venture capitalists (VCs) have emerged as key alternative options for the sector to address the funding gap. However, the penetration of angel investment and venture capital funds in MSMEs here lags global standards. According to experts and industry players, India's angel investment and venture capital ecosystem is still in its early stages, trailing global benchmarks in size, scope, and maturity. In 2024, less than 5% of India's 63 million MSMEs received equity funding, as per a report by the MSME Ministry . MSMEs in the country, particularly those in manufacturing and services, have been struggling with challenges such as low scalability, low digital penetration, and high-risk perception. With limited access to institutional capital, they primarily depend on self-financing or bank credit to overcome these changes. Amit Mittal, Founder & MD of Chandpur Paper, says India's MSMEs receive very little angel and venture capital finance, while technology-oriented start-ups get most of the investments. In FY24, India's VC funding returned to around $13.7 billion, a 1.4 times surge from the levels of 2023, as investors regained confidence and investments in the technology sector saw a jump, according to a report by global consultancy Bain & Company released earlier this year. Angel investments contributed $500-700 million during this period, but less than 10% went to traditional MSMEs. This highlights a significant funding gap for non-tech businesses. Live Events Echoing Mittal's view, Pushkar Mukewar, CEO & Co-founder of Drip Capital, says the Indian MSMEs face several challenges when seeking institutional or equity capital, including limited financial documentation, lack of formal credit history, low investor awareness about non-tech MSME sectors, and geographical disadvantages. 'Traditional VC or angel investors often see MSMEs as high-risk and low-return due to their fragmented and informal operations.' How the things can get better Jaydeep Birje, CEO of Leo Engineers, also believes that the government's efforts via Startup India, the SIDBI Fund of Funds, and the Credit Guarantee Scheme are slowly pushing the needle. 'Some early-stage investors are also now expanding their scope beyond tech to more inclusive, impact-oriented MSMEs,' says Birje. Mittal emphasises that many MSMEs lack awareness and preparedness for equity funding. To boost access to funding, India needs to foster co-investment models, incentivise MSME-centric investors and develop digital matchmaking platforms. 'Mentorship and outreach in tier II and tier III cities can improve investor readiness. A focused ecosystem approach is essential to channel meaningful capital into this underfunded yet vital sector,' adds Mittal. Arvind Singh, Founder & CEO of Quest OntheFRONTIER, notes that the landscape is evolving, and changes are already underway. 'In 2025, angel investing in India is more structured and accessible than ever, driven by government initiatives like Startup India and the abolition of the Angel Tax (effective April 2025),' says Singh. A section of experts say that investors are now focusing on MSMEs with strong digital foundations, including robust online presence, e-commerce capabilities and technology adoption. This shift is driven by the recognition that digitally mature MSMEs are better positioned to scale and attract further funding. Additionally, the growth of angel networks and platforms has increased access to investors for MSMEs, including those in tier II and tier III cities, experts add. 'Multiple government schemes, such as the Startup India Seed Fund , MUDRA loans, and the Credit Guarantee Fund (CGTMSE), aim to provide MSMEs with access to capital, mentorship, and regulatory relief. The government is also encouraging sector-specific funds and Alternative Investment Fund (AIF) capital deployment into non-tech MSMEs. Exit pathways for VCs have improved, with streamlined M&A approvals and enhanced IPO regulations, increasing liquidity and making it more attractive for investors,' says Singh. According to Arvind Singh, India's MSMEs are poised for better access to angel and venture capital funding in 2025, driven by policy reforms, a thriving investor ecosystem and digital and technological readiness. While challenges remain—especially for non-tech MSMEs and those outside major urban centres—the overall trajectory is strongly positive, he adds. Similarly, Mukewar highlights that non-dilutive financing models are gaining popularity as a means to address the funding gap for MSMEs; options such as supply chain finance, invoice discounting, cash-flow-based lending, and marketplace seller financing are emerging as scalable solutions. 'These models leverage transaction data rather than collateral or credit history, making capital more accessible and relevant for MSMEs focused on exports, trade, or e-commerce. Scaling such fintech-driven models with supportive regulation and wider adoption can unlock meaningful capital access for India's MSMEs,' adds Mukewar. Singh believes there is a need to increase awareness and improve access for MSMEs to various financing options. 'Some countries, like Singapore, set up MSME support centres in the industrial clusters. Second, the government should encourage and incentivise/subsidise the MSMEs to go digital and automate their business processes, leading to the formalisation of their financial operations and also improving productivity,' says Singh. Singh suggests that finance providers, including banks and NBFCs, should leverage digital platforms and data-driven credit assessment tools and reach tier II and tier III cities and rural areas, thereby expanding funding access to MSMEs in underserved regions. This integrated approach can enhance efficiency, fairness, and inclusivity in MSME financing, says Singh.
Time of India
28 minutes ago
- Time of India
Mayuresh Joshi on 3 sectors where earnings & valuation support can take stock prices higher
Mayuresh Joshi , Head Equity, Marketsmith India, says healthcare, particularly hospitals adopting asset-light models, shows earning stability with improved occupancy and revenue per bed. Select NBFCs with strong financials are poised for growth amid falling interest rates. Consumption-driven stocks like Vishal Mega Mart and V-Mart Retail could benefit from rebounding rural spending, exhibiting potential for volume and price gains. What are you making of this very range-bound trade that we have been stuck in for a while now? At the same time, once again, it is the broader markets wherein we are seeing movement and today unfortunately it is quite down. Where will the largecaps find the next set of triggers from? Mayuresh Joshi: The markets are reacting in terms of the geopolitics, specifically what's happening in West Asia. But there is some hope that if any news comes through in terms of de-escalation over the next few days, something which probably is assuming that the worst in terms of the conflict might be behind us, we will definitely come out of the range-bound trade that we are in. by Taboola by Taboola Sponsored Links Sponsored Links Promoted Links Promoted Links You May Like Join new Free to Play WWII MMO War Thunder War Thunder Play Now Undo Obviously, within largecaps, the construct still remains positive in terms of select leadership BFSI stocks because the space generally looks geared up in terms of better earnings growth. Obviously, OMCs in the oil and gas space, become more of a tactical trade as we speak. But generally for largecaps, the mood has been pretty sanguine so far. It is the midcaps where the entire action might be over the next few quarters as earnings start coming back. So, midcaps and select leadership stocks might fare well where earnings are expected to hold up at least in a domestic context for the next few quarters. Within this lot of sector churning that is underway, which sector is poised for a good recovery? We just concluded the earning season as well. Is there any sector you will be watching closely for the next couple of quarters wherein earnings and valuation support can take the stock prices higher as well? Mayuresh Joshi: Healthcare as a space is where we believe stocks can do well selectively. Within healthcare, hospitals as a space has delivered a very decent set of numbers as far as Q4 is concerned and our take is that the asset light model that a lot of hospital stocks are embarking upon over the last few quarters has started yielding results both in terms of the average revenue per operating bed as occupancy rates are inching higher. We are probably seeing the average length of stay coming down as hospitals mature. And therefore, hospitals within healthcare as a space is where the earning stability might continue and a lot of hospitals are showing that earning strength specifically in their price strength as well as we see it in Marketsmith India. So, the ratings, rankings, institutional holding – all the elements that we follow, are getting exhibited in this space. Live Events You Might Also Like: How should you place your bets as Nifty makes a U-turn from 25,000? Vinay Rajani answers Certain hospital stocks like Kims, Fortis Healthcare , Narayana Hrudayalaya are where earning stability might continue over the next few quarters. The other space is obviously within BFSI where we have seen some strength in NBFC stocks. Our view is that select NBFC stocks might continue doing well. Therefore, in a falling interest rate scenario with the RBI frontloading 50 bps of rate cuts, the expectations is that in terms of stronger franchises with a better diversified borrowing mix, a better advanced mix, better capital adequacy and therefore a better take in terms of the overall balance sheet growth leading to better RoEs and ROAs, they can continue doing well. So, stocks like Shriram Finance are something we continue holding in our domestic and global portfolios. Last but not the least, a few of the consumption-driven stocks. With better monsoons, rural, semi-urban consumption which has started coming back should come back even more strongly in the second half and therefore for a few apparel makers Vishal Mega Mart, which just concluded a big block deal, V-Mart Retail, the same-store sales growth (SSG) has been pretty decent for these companies. It is a good mix for apparel, FMCG, and non-FMCG, the price points are appropriately placed and in tier II, tier III cities where the expectation is that if growth rebounds very strongly in terms of discretionary spending, these guys might benefit quite significantly on all parameters that we probably put through and therefore rating and rankings look superb. So, Vishal Mega Mart, V-Mart might be a couple of ideas on the semi-urban/rural discretionary spend which can exhibit better volume and price moves as far as balance sheets are concerned.
The Hindu
28 minutes ago
- The Hindu
HAL and Safran to produce forged parts for LEAP engines
Hindustan Aeronautics Limited (HAL) has signed an agreement with Safran Aircraft Engines (SAE) for the industrialisation and production of rotating parts for LEAP engines. The agreement, which was signed at the ongoing 55th edition of the Paris Air Show (June 16-20, 2025), follows the memorandum of understanding signed by Safran Aircraft Engines and HAL in October 2023 to develop industrial cooperation in LEAP engine parts manufacturing, as well as the contract signed last February by both partners to produce Super alloy forged parts. HAL aims to support the strong growth of the Indian aerospace market and ensure the ramp-up of LEAP engines powering single-aisle civil aircraft. Safran Aircraft Engines is developing a complete aerospace ecosystem based on the creation of new facilities in India. Upon development of critical near-net Ring Forging technology at HAL, SAE and HAL have now signed an agreement for production of Inconel parts at the state-of-the-art Ring Rolling facility at HAL's Foundry and Forge Division in Bengaluru, supporting LEAP program's ramp-up for global airline requirements. Further, both companies are working together to develop technology for the balance parts. 'We are really proud to expand this long-standing partnership with Safran and to develop our industrial expertise in forging processes for Inconel parts for the LEAP program,' said Dr. D. K. Sunil, Chairman and Managing Director of HAL. 'We are pleased to extend our collaboration with HAL, a key player of the Indian aerospace industry. This industrial cooperation is part of our roadmap to diversify our production sourcing and strengthen our industrial footprint in India, so as to support the growth of domestic air traffic with our LEAP engine and prepare for future requirements of military parts,' said Dominique Dupuy, Vice-President (Purchasing), Safran Aircraft Engines.
