Banks’ Dividends May Drop 4% In FY26 As Credit Slows

Dividend pay-outs by Indian banks are expected to decline in FY26 due to pressure on net interest margins (NIMs) and net profits amid a slowdown in credit, according to a report by S&P Global Market Intelligence. The analysis forecasts that the aggregate dividend from 12 major banks will fall by about 4.2 per cent to USD 5.98 billion in FY26, down from USD 6.24 billion in FY25. The previous year had seen a 15.3 per cent rise in payouts.

Tusharika Aggarwal, equity analyst, S&P, said the expected decline in dividends is driven by a combination of margin pressures and profitability challenges. Leading banks such as HDFC Bank and Bank of Baroda are expected to cut their dividend per share for the first time in at least four years. HDFC Bank’s dividend per share is projected to fall to Rs 8.25 in FY26 from Rs 11 a year earlier, while Bank of Baroda’s payout may decline to Rs 7.90 from Rs 8.35. In contrast, State Bank of India is expected to maintain its dividend at Rs 16 per share, while ICICI Bank may raise it to Rs 12.

Aggarwal highlighted that rate cuts have squeezed NIMs, while intense competition for deposits has driven funding costs higher. Weaker credit growth amid subdued demand, cautious central bank policies on unsecured lending, and an uncertain economic environment are also expected to slow earnings growth.

Meanwhile, finance companies (fincos) are poised to expand at a faster pace than banks. S&P Global Ratings projects loan growth of 21 per cent to 22 per cent for rated fincos over the next two years, compared with 11 per cent-12 per cent for banks. Fincos’ retail focus, underpenetrated markets, and higher net interest margins are cited as key drivers.

The slowdown in banks’ credit growth reflects multiple structural shifts. Large corporates are increasingly tapping into commercial paper and bond markets instead of relying on bank loans. The Reserve Bank of India’s tightening of unsecured lending rules and rising funding costs due to deposit competition are further constraining banks’ lending share and creating opportunities for finance companies.

This marks a significant turning point in the lending landscape. FY26 is expected to be the first year in several when banks’ dividend pay-outs decline, while finance companies continue to consolidate their position in India’s credit ecosystem. Policy changes, such as the US’s 50 per cent tariff on Indian goods and recent GST rate cuts announced by the government, are also influencing profitability and shaping the outlook for the sector.