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Recent regulatory measures are expected to help India's banking sector navigate risks arising from the West Asia conflict and potential El Nino conditions, according to a report by Nuvama.
The report said that while macroeconomic uncertainties warrant caution, regulatory support in the form of Foreign Currency Non-Resident (Bank) deposit, or FCNR(B), relaxations and the Emergency Credit Line Guarantee Scheme (ECLGS) should provide countercyclical support to growth, margins and asset quality. It stated, "Although risks from the West Asia conflict and El Nino warrant caution, recent FCNR (B) and ECLGS measures shall provide countercyclical support to growth, margins and asset quality". According to the report, the financial sector witnessed a widening divergence in FY26. Public sector banks, small and mid-sized private banks and second-line NBFCs outperformed, while large private sector banks and NBFCs lagged due to concerns related to growth, margins and management issues. However, Nuvama believes the sector now stands at a crossroads where macro headwinds from the West Asia conflict and El Nino risks are being balanced by supportive regulatory measures. The report highlighted that FCNR(B) relaxations could particularly benefit private sector banks that have been facing pressure on deposit mobilisation. The measure is expected to support funding availability and strengthen the liability franchise of banks. At the same time, the Emergency Credit Line Guarantee Scheme is expected to provide support to borrowers and help contain asset quality stress, thereby supporting credit growth and earnings resilience. Against this backdrop, Nuvama said it prefers banks over non-banking financial companies (NBFCs), and within banks, favours private sector banks over public sector lenders. The brokerage noted that private sector banks are better placed to capitalise on these regulatory tailwinds while also managing the transition to the Expected Credit Loss (ECL) framework. According to the report, large private sector banks are well positioned for a turnaround during FY27-FY29. It expects these banks to deliver above-system credit growth, gain market share from public sector banks and maintain a healthy return on assets in the range of 1.8 per cent to 2.1 per cent. Nuvama also said any future interest rate upcycle could support margins for private banks because of their higher share of External Benchmark Lending Rate-linked loans. The report added that the impact of the upcoming ECL transition is likely to remain limited for most of the large private sector banks because of their strong capital and provisioning buffers. (ANI)
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