Indian Banks Poised for Profit Surge: Key Factors Driving Growth Revealed!

According to a new report from Systematix Research, the profitability of banks in India is expected to see a significant improvement in the coming quarters. This positive outlook is primarily driven by four key factors: enhanced advances growth, lower interest expenses due to the ongoing deposit repricing cycle, the benefit derived from reduced CRR requirements, and a normalization of slippages in the unsecured lending segment, which also includes lower slippages from microfinance institutions.

Net Interest Margins (NIMs) were projected to be sequentially lower in the second quarter of fiscal year 2026, with an expectation of bottoming out unless there were further interest rate cuts. While the yield on advances has contracted for most banks, this has been partially offset by a reduction in the cost of deposits and borrowings.

The full impact of term deposit repricing is anticipated to become visible in the second half of FY26. Coupled with the benefits of CRR cuts, bank management commentary suggests margin stabilization by the third quarter and improvement starting from the fourth quarter, provided no further rate cuts occur.

Advances, which were subdued in the first quarter, have shown renewed momentum, bolstered by factors like the GST rate cut and festive season demand. Consequently, year-on-year credit growth reached 11.4 percent.

Profitability in the second quarter, initially expected to be muted, has largely exceeded expectations due to higher advances growth, reduced slippages and provisions, and support from fee and other non-interest income. Reserve Bank of India data shows banking system advances expanded by 4.2 percent quarter-on-quarter and 11.4 percent year-on-year as of October 3, 2025, while deposit growth stood at 2.9 percent quarter-on-quarter and 9.9 percent year-on-year, indicating deposits lagged advances growth.

Impact This news is positive for the banking sector. Improved profitability can lead to stronger financial health for banks, potentially enabling increased lending, better shareholder returns, and boosting investor confidence in Indian financial institutions. Rating: 8/10.

Difficult Terms Advances Growth: An increase in the total amount of loans and credit extended by banks to individuals and businesses. Interest Expenses: The costs incurred by banks on the money they borrow, such as from customer deposits. Deposit Repricing Cycle: The period during which interest rates on existing bank deposits are adjusted to reflect current market conditions, or new deposits are accepted at prevailing rates. CRR (Cash Reserve Ratio): A mandatory percentage of a bank's total deposits that must be held in reserve with the Reserve Bank of India. A reduction in CRR allows banks to lend more. Slippages: Loans that have deteriorated in quality and are at high risk of becoming Non-Performing Assets (NPAs). MFI (Microfinance Institution): Organizations that provide financial services, such as loans, to low-income individuals and small businesses who typically lack access to traditional banking. Net Interest Margins (NIMs): A profitability metric for banks, representing the difference between the interest income earned on assets (like loans) and the interest paid out on liabilities (like deposits), expressed as a percentage of interest-earning assets. Yield on Advances: The effective interest rate that a bank earns on its loans. Cost of Deposits and Borrowings: The average interest rate a bank pays on its deposits and other sources of funding. Term Deposit: A type of deposit account with a fixed maturity date and a predetermined interest rate. Credit Growth: The rate at which the total amount of money lent by financial institutions to customers increases over a period. Fee and Other Non-Interest Income: Revenue generated by banks from services other than interest, such as transaction fees, account charges, and foreign exchange services.