Indian Banks' Asset Quality Expected to Improve Amid Geopolitical Tensions

The asset quality of Indian banks is expected to further improve over the next year, providing cushion against pressure on margins, liquidity and credit growth arising from geopolitical tensions and broader macroeconomic uncertainties. According to consensus estimates compiled by S&P Global Market Intelligence, the gross non-performing asset (NPA) ratio of State Bank of India is seen declining to 0.92% by March 2027 from 0.96% at the end of FY26. HDFC Bank ‘s bad loan ratio is projected to improve to 0.76% from 0.78%. The report attributed the betterment to moderating stress in unsecured retail segments such as personal loans, credit cards and microfinance. The banking sector’s asset quality has steadily improved over the past few years, with the industry’s aggregate bad loan ratio falling to its lowest level in nearly a decade as lenders cleaned up balance sheets and tightened underwriting standards, the report said. The improvement comes at a time when banks are facing pressure on profitability. Following cumulative policy rate cuts of 125 basis points in 2025, net interest margins (NIMs) across major lenders have narrowed. Axis Bank reported a 15-basis-point sequential decline in NIM to 3.39% in the March quarter, while SBI’s margin fell 14 basis points to 2.71%. Analysts expect margins to remain largely stable, although elevated funding costs and weak deposit growth could limit any recovery. The report noted that the West Asia conflict could deter foreign investors from Indian capital markets, putting pressure on liquidity and deposit growth. According to Ankit Bihani, equity research analyst at Nomura, this could affect loan growth and net interest margins. Geopolitical tensions have already weighed on the investor sentiment. The report said 18 of the 20 major listed banks in India witnessed a decline in market capitalisation during the March quarter amid a broad-based sell-off across sectors. Citing comments made by HDFC Bank Chief Financial Officer Srinivasan Vaidyanathan during an April earnings call, the report said the future trajectory of margins would depend on liquidity conditions, borrowing requirements and oil prices, with geopolitical uncertainty prompting a pause in the interest rate cycle.