Recent policy measures are likely to provide support to India’s banking sector as lenders face uncertainty from geopolitical tensions in West Asia and possible El Niño-related challenges, according to a report by Nuvama. The brokerage noted that while the current macroeconomic environment requires careful monitoring, steps such as easing rules for Foreign Currency Non-Resident (Bank) deposits, or FCNR(B), and extending support through the Emergency Credit Line Guarantee Scheme (ECLGS) could act as countercyclical measures. These initiatives may help sustain credit growth, protect margins, and maintain asset quality.

Nuvama stated that risks linked to the West Asia situation and weather-related disruptions due to El Niño remain areas of concern, but recent regulatory interventions could provide stability and support to the financial sector. The report pointed out that the banking and financial services space saw a mixed performance trend in FY26. Public sector banks, smaller private banks, and mid-tier non-banking financial companies (NBFCs) performed relatively better, while large private banks and bigger NBFCs faced pressure due to concerns over growth momentum, profitability, and management-related issues.

The brokerage believes the sector is currently at an important stage where external challenges are being offset by favourable regulatory support. According to Nuvama, the relaxation in FCNR(B) norms could be especially beneficial for private banks that have been dealing with challenges in attracting deposits. The move may improve access to foreign currency funding and strengthen banks’ overall liability profiles.

The ECLGS framework is expected to provide relief to borrowers and reduce potential stress on bank balance sheets. By supporting credit flow and helping businesses manage financial pressure, the scheme could improve earnings stability for lenders. Given these factors, Nuvama said it remains more positive on banks compared with NBFCs and prefers private sector banks over public sector lenders. The brokerage believes private banks are better positioned to benefit from regulatory changes and handle the transition towards the Expected Credit Loss (ECL) accounting framework.

The report added that leading private sector banks could see stronger growth between FY27 and FY29. Nuvama expects these lenders to achieve credit growth above the industry average, gain additional market share from public sector banks, and maintain return on assets (RoA) levels between 1.8% and 2.1%.

The brokerage also highlighted that a potential future interest rate increase cycle could support private banks’ margins, given their larger exposure to loans linked to external benchmark rates. Nuvama further stated that the upcoming shift to the ECL framework is unlikely to create major disruption for most large private banks due to their strong capital positions and adequate provisioning buffers.