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RBI Policy and Business updates signal improved scenario for BFSI

ICICIdirect Research 10 Oct 2025 DISCLAIMER

The Reserve Bank of India (RBI) has issued draft guidelines introducing the Expected Credit Loss (ECL) framework and revisions to the credit risk capital framework, effective from April 2027. Accordingly, risk weight has been made more granular and provisions are to be recognized on forward-looking basis. From the perspective of banks, new framework is expected to result in an increase in provisioning requirements, however, the glide path allowed by regulator till FY31 is expected to ensure smooth transition without any substantial impact on earnings.
Systemic credit growth remained steady at ~10% YoY (~2.7% QoQ), indicating early signs of stabilization after recent moderation. Liquidity conditions were comfortable during Q2, with deposit growth of ~9.8% YoY keeping pace with credit, helping sustain system stability.
Across segments, retail and MSME demand continues to provide a solid foundation, gold loans remain buoyant, and early signs of recovery are visible in rural credit. Infrastructure lending could gradually pick up aided by regulatory support, while corporate working capital demand is expected to benefit from improving business activity. Together, these factors suggest that credit momentum is likely to stay healthy into H2FY26.
Trade-off on growth and NIM continue to persist. While full impact of repo rate cut and muted traction in low-cost deposit is expected to exert pressure on margins, increase in CD ratio, easing deposit cost and CRR benefit is seen to partially cushion the impact, thereby resulting in decline of 5-15 bps in Q2FY26.
As per provisional figures for Q2FY26, Public sector banks delivered strong business momentum, with Bank of Baroda, Bank of India, Bank of Maharashtra reporting >5% QoQ loan growth, alongside healthy deposit accretion. Expectation of growth is likely to come from RAM segment which should cushion NIM compression.
Among private banks, HDFC Bank and Kotak Bank posted healthy sequential growth (>4% QoQ) reflecting early signs of balance sheet acceleration. CSB Bank also maintained strong traction in both advances (5.4% QoQ) and deposits (10.3% QoQ), aided by its gold loan franchise. In contrast, IndusInd Bank underperformed materially, with a sequential decline in both advances and deposits (~2% QoQ), pointing to weak franchise momentum relative to peers.

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