A report by Yes Securities indicates that El Nino conditions could have some impact on agricultural loans, but are not expected to cause major disruptions to the banking sector. Overall credit costs are projected to remain stable in the fiscal year 2027 (FY27).
Key Takeaways from the Report
The report does not anticipate any material rise in credit costs in FY27 compared to FY26. It also does not foresee a significant one-time impact from the implementation of Expected Credit Loss (ECL) norms, which are scheduled to take effect in FY28.
Agricultural loans are identified as one of the key areas to monitor as weather conditions evolve. The report states, "El Nino may impact some agri loans but past experience tells us that this may not be overly disruptive, although we will monitor the possibility of a Super El Nino."
Three Key Monitorables for the Banking Sector
The report outlines three primary factors to watch: the impact of the West Asia conflict, the effects of El Nino, and the lagged impact of trade tariffs. These elements could influence the performance of the banking sector in the coming months.
Credit costs associated with unsecured loans, which had previously increased due to a domestic economic slowdown and overheating in that segment, have started to decline. However, they may remain somewhat sticky because of a slow recovery in nominal GDP growth and the potential impact of El Nino on the microfinance sector.
MSME Loans Under Watch
Micro, Small, and Medium Enterprises (MSME) loans are also under observation due to possible disruptions arising from the West Asia conflict and trade-related challenges. Despite these risks, the report does not expect any major build-up of stress in this segment. It adds that the Emergency Credit Line Guarantee Scheme (ECLGS) could provide protection if needed.
Credit Growth Outlook
Yes Securities expects overall bank lending to remain reasonably healthy, supported by stronger corporate loan growth as well as sustained growth in MSME and retail loans. The report notes that credit growth has reached approximately 17 percent, driven by improved corporate loan growth and stronger MSME lending.
While growth may moderate somewhat by the end of the financial year, it is expected to remain broadly in the low-to-mid teens range.
Net Interest Income Projections
The report also forecasts a recovery in net interest income (NII) growth for its coverage banks, from 5.3 percent in FY26 to 16.1 percent in FY27. NII growth is expected to remain at 16.1 percent in FY28 and 15.1 percent in FY29, respectively.
