India’s banking sector has been squeezed between rising costs and slowing credit demand, for over a year. The downgrade cycle may be nearing an end, according to UBS Securities, a multinational investment bank. However, Vishal Goyal, Head of India Research at UBS Securities, also warned that a full recovery for the country’s financial sector is unlikely before financial year ending March 2027.

“Our earnings estimates are lower than the consensus, mainly because we feel bit of credit cost is still to come, versus growth expectations also, clearly in consensus numbers are slightly more benign,” he said in a conversation with CNBC-TV18.

Lenders in India have been stretched for liquid cash, commonly referred to as liquidity, needed to pay short-term obligations like advance tax on behalf of account holders. The sustained selling by foreign portfolio investors further crunched the ability to give out fresh loans at affordable interest rates. Liquidity had hit its worst level in 15 years by mid-January

, before the Reserve Bank of India (RBI) stepped in to ease the cash crunch.

Since then, the RBI has already infused ₹5.5 lakh crore via bond purchases, forex swaps and other measures to ease the cash crunch and cost of funds for the lenders.  With interest rates trending down, if the cost of funds doesn’t reduce, banks and other financial institutions may continue to see their profit margins shrink, Goyal warned.

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On the other hand, the stock prices have cooled down significantly. The Nifty Bank is down over 7% in the last six months. UBS Securities prefers private banks over their public-sector peers.

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