Increase in private capex to improve credit growth from H2FY26- Report

Delhi Delhi: Despite difficult conditions in the third quarter, credit growth will improve from the second half of financial year (FY) 2026, driven by improvement in the unsecured sector and a sequential increase in private capital expenditure (capex), according to a report by Mirae Asset Sharekhan. Improved liquidity and rate cut expectations by the Reserve Bank of India (RBI) are supporting the sentiment, the report said. It added that expectations of a modest rate cut will help support the net interest margin (NIM). Additionally, the report said that credit costs are expected to normalise as stress in the unsecured segment stabilises.The third quarter of FY25 has been challenging for the banking sector due to high credit costs, slow loan and deposit growth, and pressure on NIM.Private banks reported slower earnings growth in the third quarter mainly due to weak operating performance and a persistent rise in credit costs, while public sector banks (PSBs) reported healthy earnings growth due to lower credit costs offsetting the lower operating performance, the report said.

According to the report, higher credit costs were due to the unsecured segment, while a lower share of unsecured loans for PSU banks supported earnings. Net interest income (NII), the difference between a bank’s interest income and its interest expense, saw lower growth, driven by lower NIM and softer loan growth. PSU banks witnessed more pressure on NIMs, while private banks reported marginally lower NIMs quarter-on-quarter. The report said PSU banks reported better earnings growth than private banks, led by lower credit costs under their coverage. Most private banks (barring HDFCB and ICICI) witnessed a steady increase in credit costs, as asset quality in the unsecured segment (credit cards and MFIs) deteriorated further in Q3FY2025. The unsecured retail segment continues to face higher defaults, impacting earnings and return ratios.