Disproportionate focus on retail asset quality, through a downcycle in policy rates, would lead to tepid credit growth for banks that would struggle to expand core profitability-or net interest margin (NIM)-through FY26, Fitch Ratings said on Tuesday.
“We expect slower-to-stable loan growth in FY25 and FY26, after 2 consecutive years of mid-teen growth,” Fitch Ratings said in a report. “We don’t expect growth to pressure solvency as banks calibrate growth and risk, driven by secured retail, and supported by opportunistic SME and corporate lending.”
Hence, collateral-backed loans are expected to be at the vanguard of retail loan expansion, potentially presaging fewer banking commitments to borrowers seeking unsecured financing. It expects the shift toward secured retail loans, such as housing, vehicle and mortgage, to gain momentum as banks pivot from unsecured consumer loans amid regulatory measures and rising delinquencies.
Fitch, which anticipates another 25 basis point policy rate cut in FY26, said declining rates, and subsequent contraction in loan yields, coupled with slowing loan growth, are likely to keep NIMs under pressure. “However, we expect margin pressure to be partly offset by the Reserve Bank‘s easier liquidity stance,” Fitch said.
