Indian banks face dividend squeeze as NBFCs gain lending ground: S&P

MUMBAI: Indian banks are staring at a tougher year as profitability weakens and finance companies step up lending, according to a report by S&P Global Market Intelligence.
Aggregate dividends of 12 large banks are projected to fall 4.2% to $5.98 billion in FY26, from $6.24 billion in FY25. This comes after a strong FY25, when banks posted double-digit credit growth and record profits. Now, compressed net interest margins due to rate cuts, higher deposit costs, and slower loan demand are expected to weigh on earnings.

HDFC Bank and Bank of Baroda are forecast to cut dividends for the first time in at least four years, to Rs 8.25 and Rs 7.90 per share respectively. By contrast, State Bank of India is likely to keep payouts flat at about Rs 16 per share, while ICICI Bank may lift dividends to Rs 12.

At the same time, finance companies are expected to expand faster than banks. S&P Global Ratings projects loan growth of 21%–22% for rated fincos over the next two years, compared with 11%–12% for banks. Their retail focus, underpenetrated markets and stronger net interest margins are seen as drivers.

The slowdown in banks’ credit growth reflects multiple shifts. Large corporates are tapping commercial paper and bonds instead of bank loans, the Reserve Bank of India has tightened rules on unsecured lending, and deposit competition is raising funding costs. These trends are eroding banks’ lending share and opening room for fincos.

The shift marks a turning point. FY26 is expected to be the first year in several when bank dividends decline, while fincos continue to consolidate their role in India’s lending system. Policy and trade shocks—such as the US’s 50% tariff on Indian goods and the GST rate cuts announced by the Govt on Sept 4—are also reshaping profitability drivers.

“The expected decline in dividend payouts is rooted in a confluence of margin and profitability headwinds,” said Tusharika Aggarwal, equity analyst at Market Intelligence. “It’s shaping up to be another challenging yet intriguing year for forecasting payouts in the Indian banking sector, given the shifting momentum in the credit system.”

The RBI also noted that “with faster monetary policy transmission to money markets, large corporates have increasingly turned to market-based instruments such as commercial paper and corporate bonds for funding, thereby reducing the demand for bank credit.”

On the other side, S&P Global Ratings credit analyst Geeta Chugh said: “Stricter underwriting standards for India’s fincos will rein in growth plans and defuse risk buildup for this financial niche.” She added that “asset quality for fincos is holding up, though some pockets of stress persist in micro finance and unsecured loans.”