Banking Sector Faces Profitability Challenges

MUMBAI: The banking sector is on the brink of a significant shift as rising bad loans threaten to erode profitability by FY26, according to a recent analysis by a leading rating agency. The report highlights a turning point for Indian banks' profitability in FY25, with expectations of further moderation in the following fiscal year.

Karan Gupta, head and director of financial institutions at the agency, pointed out that the profitability of banks is expected to decline further in FY26. This downturn is attributed to an anticipated increase in loan defaults and higher credit costs, surpassing the low levels seen in FY24. Gupta emphasized that the stress on asset quality will predominantly stem from unsecured retail loans, which, despite accounting for a small fraction of banking credit, pose a significant risk.

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