The report identified El Niño as one of the three key risks for lenders, alongside the ongoing West Asia conflict and the delayed impact of global trade tariffs. These factors could influence credit quality across select portfolios, particularly agriculture, microfinance and MSME lending.

El Niño-related weather risks could create some pressure on agricultural lending in FY27, but India’s banking sector is unlikely to witness any significant deterioration in asset quality, according to a report by Yes Securities.

The brokerage expects overall credit costs for banks to remain broadly in line with FY26 levels, while the proposed implementation of the Expected Credit Loss (ECL) framework from FY28 is unlikely to result in any material one-time impact on banks’ balance sheets.

The report identified El Niño as one of the three key risks for lenders, alongside the ongoing West Asia conflict and the delayed impact of global trade tariffs. These factors could influence credit quality across select portfolios, particularly agriculture, microfinance and MSME lending.

Agricultural loans remain under close watch as weather conditions evolve. While El Niño could affect farm incomes and repayment capacity in some regions, the report noted that historical trends suggest the impact is unlikely to be significantly disruptive unless a stronger or “Super El Niño” event materialises.

The brokerage said stress in unsecured retail lending has started easing after witnessing pressure due to slower economic growth and rapid expansion in the segment. However, credit costs could remain elevated for some time because of slower nominal GDP growth and the possibility of weather-related disruptions affecting rural incomes and microfinance borrowers.

On the business outlook, the report said bank credit growth is likely to remain healthy, supported by improving corporate loan demand and sustained growth in MSME and retail lending.

MSME lending also continues to be monitored due to external uncertainties, including geopolitical tensions and global trade disruptions. Despite these risks, Yes Securities does not expect any major build-up in stress within the segment and noted that the Emergency Credit Line Guarantee Scheme (ECLGS) could provide support if required.

On the growth front, the brokerage maintained a positive outlook for the banking sector, expecting credit expansion to remain healthy in FY27. Improving corporate loan demand, coupled with sustained growth in MSME and retail lending, is expected to support overall loan growth.

According to the report, bank credit growth has recovered to around 17 per cent, driven largely by stronger corporate lending. While loan growth may moderate towards the end of the financial year, it is expected to remain in the low-to-mid teens range.

The report also projected a sharp improvement in net interest income (NII) growth for banks under its coverage. NII growth is expected to rise to 16.1 per cent in FY27 from 5.3 per cent in FY26 and remain above 15 per cent over the subsequent two financial years.

Overall, Yes Securities expects the banking sector to maintain stable asset quality and healthy credit growth despite external risks, with weather developments, geopolitical events and global trade conditions remaining the key monitorable during FY27.