After a challenging first half marked by margin compression and falling loan yields, India’s banking sector is set to turn the corner in the third quarter of FY26 (3QFY26). Private and public sector banks are entering a transition phase—where lagged benefits of deposit repricing, systemic liquidity infusion, and improving asset quality start to lift earnings. The recovery will be gradual but meaningful, setting the tone for FY27’s double-digit earnings growth.

Loan yields decline, but not equally

While the weighted average lending rate (WALR) on fresh loans fell for the system, private banks managed a month-on-month uptick, showing tactical flexibility. Public sector banks, in contrast, saw a sharper 30 basis point decline over three months.

Deposit rate cuts finally flowing through

Most banks have now cut savings account (SA) and term deposit (TD) rates by 20–100 basis points across tenors, with a deeper impact expected in the second half of FY26 (2HFY26).

3QFY26 emerges as a profit turning point

With repo rate cuts behind and liquidity support ahead, net interest margins (NIMs) are expected to stabilise and earnings to pick up from 3Q onwards.

Credit cost discipline back in focus

Asset quality pressures are easing—especially in retail unsecured and microfinance institution (MFI) portfolios—providing room for provision write-backs.

CASA erosion slows; deposit franchises matter

more Despite a drop in current account savings account (CASA) ratios across the board, banks with stronger liability profiles are better positioned to navigate margin pressures.

Pre-provision operating profit (PPoP) trend looks up

Motilal Oswal expects aggregate private bank PPoP to rise from INR 698 billion in 1QFY26 to INR 831 billion in 4QFY26—driven by a broad recovery in earnings.

FY27 poised for a strong rebound

Private bank earnings growth is expected to jump to 21.7% in FY27 from 6.9% in FY26, led by margin recovery and lower credit costs.