The Indian banking sector has gone through a tough cycle in recent years. Rising bad loans, shrinking margins, and balance sheet stress made growth difficult. But things may finally be turning around. By FY27, banks and financial institutions could enter a much stronger phase of growth and profitability.

Let’s break down the key trends shaping this change.

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1. Banking Rebound by FY27

The worst phase for banks may be behind us by FY26. From FY27 onward, credit growth is expected to rise, helping banks deliver better profits. Margins, which have been a concern, may also stabilize as loan growth accelerates.

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2. Small Finance Banks on the Mend

Small finance banks (SFBs) struggled over the past two to three years due to funding challenges and weaker balance sheets. Now, their financial health is improving. As the credit cycle turns positive, SFBs could see significant improvement in performance and market perception.

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3. PSU Banks Regaining Strength

Public sector banks (PSUs) are no longer the weak link in the industry. They are now competing head-to-head with private banks in areas such as housing, auto, and corporate loans. Despite this transformation, many PSU banks are still trading at relatively low valuations, making them attractive for long-term investors.

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4. Valuation Gap Between PSU and Private Banks

While PSU banks continue to trade below their book value, private banks are valued more fairly. If credit growth sustains in the 13–15% range, even private banks may look undervalued in the coming years. This creates opportunities across both categories.

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5. Key Takeaways

• By FY27, banks are likely to benefit from stronger credit growth and higher profitability.
• Small finance banks could emerge as strong performers after a difficult phase.
• PSU banks are proving to be as competitive as private players, while still offering attractive valuations.

Overall, the future of India’s banking sector looks promising—provided no major credit crisis disrupts the growth cycle.