Goldman Sachs in its latest report noted that foreign investors have sold nearly $9 billion (around Rs 75,000 crore) worth of Indian financials since 2024, the largest sectoral outflow in two years. Domestic mutual funds, too, have stayed cautious, holding around 200 basis points or 2% less exposure to banks and NBFCs compared to benchmark indices.
This steady selling, Goldman Sachs said, has left banking stocks cheap by historical standards. Despite steady profit forecasts, valuations remained at mid-cycle levels, making the sector look attractive again. The brokerage pegs the earnings for banking companies to grow by around 15% in 2026, while share prices fail to keep up with the pace. In their view, that gap gives investors a favourable risk-reward, banks and NBFCs are still priced lower than the broader market even as profits are set to recover.
Goldman Sachs on Indian banks: Is the tide turning?
After two years of tight money conditions, Goldman Sachs stated that the environment for Indian banks is finally turning supportive. The Reserve Bank of India (RBI) has been cutting interest rates and adding liquidity to the system, while also relaxing several lending and capital rules that had earlier kept banks cautious.
In 2025 alone, the RBI has reduced its policy rate by a 100 basis points or 1%, one of the fastest easing phases since the global financial crisis. It has also announced a cut in the cash reserve ratio (CRR).
Goldman Sachs anticipates these steps, along with softer capital requirements on loans to small businesses and finance companies, could free up around 2% of total bank credit over the next two years. To put it simply, banks will have more room to lend and lower funding costs, setting the stage for credit growth to pick up in FY26 and FY27.
“Easier financial conditions, driven by rapid policy rate cuts, improved liquidity, and a broad set of RBI relaxations, should progressively lower banks’ capital constraints and funding costs,” Goldman Sachs analysts wrote.
Goldman Sachs on new RBI norms for banks
The series of changes launched this year represents one of the broadest deregulation phases since the post-pandemic tightening of 2023. Goldman Sachs estimates the new rules could free up lending capacity equivalent to about Rs 3 lakh crore across the banking system by 2027.
Taken together, these steps give banks more flexibility to lower lending rates where credit demand is weak and improve profitability where spreads have compressed. Most changes will come into effect between FY26 and FY27.
Asset quality fears a thing of past?
The report noted that concerns around asset quality particularly in unsecured lending have already peaked. After the RBI tightened norms on personal loans, credit cards, and microfinance in late 2023, growth in these segments slowed sharply.
Growth in personal loans and credit cards has gone down drastically. Bank lending in these unsecured segments rose just 8% in August 2025, compared with 26% in late 2023. Microfinance, which was expanding at 27% in March 2024, has now started to shrink.
This pullback, though painful in the short-term, has helped banks clean up their books. “These measures are now yielding stable or improving asset quality across key segments, suggesting the asset-quality cycle has largely peaked,” Goldman Sachs said, adding that this stability sets the stage for a gradual recovery in credit growth from the second half of FY26.
Goldman Sachs expects another rate cut
While liquidity and capital are no longer constraints, demand for new loans remains subdued, especially from corporates. Goldman Sachs attributed this to external headwinds such as higher US tariffs on Indian goods and rising visa costs that affect IT services and investment sentiment.
Goldman Sachs expects the overall economic environment to become more favourable for banks in 2026. The government’s tight spending discipline, it said, has likely run its course, leaving room for higher public investment and stronger demand. The brokerage also expects the RBI to cut interest rates once more before the end of 2025.
Taken together, these shifts should help revive loan demand and make conditions more supportive for credit growth in 2026, the report said.
2026 an inflection point for earnings?
Investor confidence in banks has remained weak in 2025 so far, indicated in a series of earnings downgrades. Goldman Sachs also noted that profit forecasts for financial companies have been cut by around 6% this year, the sharpest in five years, while banks have seen cuts of nearly 8%. The brokerage cited falling lending rates during the RBI’s easing cycle and slower loan growth as the reason.
As a result, expectations for the September quarter (Q2FY26) remained muted. Analysts now see barely 1% YoY profit growth for the overall financial sector, and a 3% decline for banks the slowest pace since the pandemic.
Even so, Goldman Sachs argued that the worst phase is over. “Peak drag on profit growth is likely behind us,” the report said, pointing to early signs of recovery in core operating profit and lending margins. The brokerage expects earnings for financials to rebound by about 15% in 2026, compared with 8% growth this year, supported by better credit demand and more stable funding costs.
Loan growth for India’s six largest banks, which together make up about 63% of total lending in the system, is projected to rise from 10.4% in FY26 to roughly 13% by FY27–FY28, Goldman Sachs added. Those three banks are: HDFC Bank, State Bank of India (SBI), ICICI Bank, Axis Bank, Kotak Mahindra Bank and IndusInd Bank.
Goldman Sachs on bank valuations
Goldman Sachs says bank and finance stocks in India are now cheap compared with their past valuations. At present, investors are paying about Rs 17 for every rupee of profit that banks and NBFCs are expected to earn next year, compared with an average of Rs 19 over the past five years.
The brokerage expects this gap to close as earnings pick up, describing the current phase as a good opportunity for long-term investors to re-enter the sector.
Goldman Sachs believes this gap will narrow as earnings recover, calling the current setup “favourable for long-term investors.”
Even after adjusting for profit growth expectations, Indian financials still look inexpensive. Goldman Sachs estimates that banks and NBFCs trade at a price-to-earnings-to-growth (PEG) ratio of about 1, while the broader market stands at 1.5.
Nifty Bank likely to outperform broader market
Goldman Sachs continued to be bullish on banks and non-banking finance companies (NBFCs), saying they are likely to lead the next leg of market gains.
The Nifty Bank index has already done slightly better than the broader Nifty up about 2% more over the past month but Goldman Sachs believes there is still room for a further 10–30% rise compared with earlier highs seen in 2019 and 2023.
The brokerage added that financial stocks are trading about 22% cheaper than the overall market, making valuations look attractive again. “We expect bank stocks to do better than the broader market as the earnings cycle improves,” Goldman Sachs said.
What it means for retail investors
After two years of tight liquidity, regulatory pressure, and falling earnings estimates, Indian banks may finally be past the hardest phase. Goldman Sachs calls this the start of a “deregulation dividend” , a period where easier rules, stronger liquidity, and a gradual pickup in loan demand work together to lift growth.
The brokerage argued that investors have become too pessimistic. Bad loans are under control, credit costs are easing, and policy support is now clearly on the side of lenders. Meanwhile, bank valuations have slipped to levels not seen in several years, even as profits are expected to rise again in 2026.
Put simply, Goldman Sachs sees the current setup as a turning point for financials, one where most of the negatives are already priced in, but the recovery story isn’t. And in markets, that’s usually when the smart money starts to come back.