Asset quality at India's leading banks is expected to improve further in the current fiscal year despite global and domestic economic headwinds, according to an analysis by S&P Global Market Intelligence. The report, titled 'Lower bad loans at Indian banks offer respite amid economic uncertainty,' indicates that major lenders are likely to witness a further decline in bad-loan ratios even as they navigate challenges from the ongoing conflict in the Middle East and the prospect of weak rainfall.
Declining Nonperforming Loans
Data compiled by S&P Global Market Intelligence showed that nonperforming loans at India's largest public and private sector banks have continued to trend lower, reflecting stronger balance sheets and improved recovery mechanisms. The nonperforming assets (NPA) ratio of State Bank of India is projected to decline to 0.92 percent in the fiscal year ending March 31, 2027, from 0.96 percent as of March 31, 2026. Similarly, HDFC Bank Ltd. is expected to report a two-basis-point reduction in its bad-loan ratio to 0.76 percent by March 31, 2027.
Profitability Pressure on Net Interest Margins
The analysis noted that 'asset quality at major Indian banks is expected to improve further, despite economic challenges from the war in the Middle East and anticipated weak rainfall.' However, the report highlighted pressure on profitability indicators, particularly net interest margins (NIMs), across the banking sector. Net interest margins at all major Indian banks declined in the quarter ended March 31. Axis Bank reported a 15-basis-point quarter-on-quarter decline in its NIM to 3.39 percent, while State Bank of India posted a 14-basis-point decline to 2.71 percent during the same period.
Despite the margin compression, some lenders maintained their outlook. State Bank of India retained its full-year margin guidance at 3 percent. Bank of Baroda, which reported a net interest margin of 2.79 percent in the quarter ended March 2026, projected its full-year NIM in the range of 2.75 percent to 2.95 percent.
Market Capitalization and Stock Weakness
The report also pointed to weakness in banking stocks amid broader market volatility. Eighteen of the 20 largest listed banks in India saw their market capitalizations drop in the quarter, driven primarily by a broad-based sell-off across sectors amid geopolitical tensions. According to S&P Global Market Intelligence, the improvement in asset quality could provide some relief to lenders as they contend with external uncertainties and softer earnings growth pressures.
Overall, the analysis suggests that Indian banks are on a path of strengthening balance sheets, with lower bad loans offering a buffer against economic uncertainty. However, the pressure on net interest margins and stock market volatility remain areas of concern for the sector.
