The upcoming quarter for the banking sector should be viewed with a balanced lens. Broadly, the outlook is positive, but it is not a case where every bank will benefit equally. Credit growth has improved meaningfully, deposit growth is getting better, asset quality remains comfortable, and return ratios are healthy. This means banks are entering the quarter from a position of strength. However, the market will not only look at whether banks are growing. It will also focus on how they are growing, the pressure they face on margins, and whether asset quality remains under control.
The biggest comfort is that loan growth has clearly picked up, with system credit growth rising to around 17.7 per cent year-on-year in May 2026, compared with 9.5 per cent in June 2025. This shows that demand for loans is no longer weak. Growth is visible across different parts of the economy, including retail, MSME, services, and industry. Industrial credit has also started improving after many years of slow growth. This is important because when companies borrow more for expansion, it usually indicates improving confidence in the economy. For banks, this should support income growth in the coming quarter.
Public sector banks may continue to remain an important part of this story. For many years, private banks were seen as the cleaner and stronger part of the banking system. That perception is now changing. Public sector banks have improved their balance sheets, reduced bad loans, and are now growing faster across several segments. In the last reported quarter, PSBs grew faster than private banks for the seventh consecutive quarter. Their retail loan growth was also strong, while some large private banks saw slower growth in retail lending. This indicates that PSBs are no longer just recovery stories; they are now real competitors.
The next important number to watch will be deposits, as a bank can give loans only if it has enough money coming in through deposits. Credit growth is currently stronger than deposit growth, making deposit mobilisation a key monitorable. Deposit growth improved to around 12.2 per cent in May 2026, but it still trails loan growth. The recent FCNR deposit measures could help banks attract more deposits from non-resident Indians. If this works well, it can give banks more comfort to grow their loan books without putting too much pressure on funding costs.
Margins may remain steady, but they need to be watched carefully. In simple terms, margins show the difference between what banks earn on loans and what they pay on deposits. In the previous quarter, margins came under some pressure as loan yields declined after a repo rate cut. However, deposit costs are also slowly coming down. This could provide some support to margins in the coming quarters. The margin outlook is not negative, but it is not effortless either. Banks with strong deposit franchises and better pricing power will be better placed.
Asset quality remains the biggest comfort. Bad loans are not rising sharply, and slippages remain under control. Public sector banks have performed especially well in this area as their loan mix has improved. Their corporate loan book is supported by healthier company balance sheets, while their retail book has a higher share of salaried borrowers. This usually makes repayment behaviour more stable, although some risks remain. A weak monsoon, higher crude prices, global uncertainty, or slower job growth could create pressure later. However, banks currently appear well prepared due to stronger provisions and healthier capital positions.
Overall, banking earnings for the upcoming quarter should remain steady and reasonably healthy. Loan growth should support income, asset quality should remain manageable, and margins may stabilise gradually. The sector does not appear overheated from an earnings perspective.
====================== (Disclaimer: This article is by Shweta Rajani, associate director, Anand Rathi Wealth Limited. Views expressed are her own.)
