Earnings for India's banking sector are approaching a trough in the December quarter, with a gradual recovery expected from the second half of FY26 as credit growth strengthens, funding pressures stabilise and stress in unsecured retail portfolios shows early signs of moderation. System credit growth has regained momentum after bottoming out in May 2025, rising to 11.7% year-on-year as of December 12, 2025, and staying above 10% since July, according to a Q3 preview by Motilal Oswal Financial Services. The recovery has been driven by a consumption-led pickup following GST cuts, alongside supportive regulatory measures and the full transmission of a 100-basis-point CRR cut.
The microfinance sector is showing signs of a turnaround, with some lenders to the economically weaker segment witnessing an increase in business volume as well as improvement in repayments, according to people familiar with the matter as reported by IANS. Small finance banks such as ESAF, Equitas and Ujjivan have reported growth in their respective micro loan asset portfolios for the third quarter of this financial year. Lenders with strong capital backing are expected to turn around faster while smaller and mid-sized MFIs are still struggling with lack of equity as well as borrowing power, according to an NBFC-MFI chief executive. Early indicators point to better collection efficiencies in microfinance, personal loans and credit cards, supporting the broader banking sector's recovery trajectory.
For the December quarter, net interest income across the banking universe is expected to grow in the mid-single digits year-on-year, with modest sequential improvement. Non-banking financial company-microfinance institutions (NBFC-MFIs) such as CreditAccess Grameen, Fusion Finance, Muthoot Microfin and Satin Creditcare Network are expected to report sequentially higher disbursement numbers. Some of these NBFC-MFIs also expect quarter-on-quarter growth in their respective assets under management. Equitas reported a 52% on-quarter surge in microfinance and micro loan advances to ₹5,159 crore at the end of December, from ₹3,395 crore at September-end, largely on account of purchase of agri loans of ₹1,343 crore from other regulated entities, according to a stock exchange filing.
Asset quality trends are beginning to improve after a prolonged period of stress in unsecured retail segments. However, stress persists in select pockets such as micro loans against property, commercial vehicles and affordable housing. The country's largest microfinance lender, Bandhan Bank, focused on balance sheet cleansing in the third quarter, selling non-performing loans worth ₹6,377 crore to asset reconstruction companies and offloading written-off loans of ₹7,426 crore, according to people in the know. An increase in loan disbursement may not translate into growth in assets under management at the sectoral level due to higher rundown of existing loans, noted another chief executive. Credit costs for large private and public sector banks are expected to remain contained, while mid-sized banks with higher exposure to unsecured portfolios are likely to see easing credit costs as stress abates.
System credit growth is expected to sustain at over 12% in FY26 and improve further to around 13% in FY27, with large private banks likely to post steady sequential growth and mid-sized banks outperforming. The overall microfinance market contracted to ₹3.46 lakh crore at the end of September 2025, reflecting a steady fall from the all-time high of ₹4.34 lakh crore recorded at the end of March 2024, according to data from CRIF High Mark. Banking sector profits are projected to compound at around 16.5% over FY26–FY28, with private banks expected to lead the recovery with stronger earnings growth.