New Delhi, July 6 (ANI): Indian banks are projected to maintain a credit growth rate of around 14 per cent year-on-year in FY27, driven by public sector banks leading an improvement in the credit-to-deposit (CD) ratio, according to a report by Motilal Oswal Financial Services (MOSFL).
Credit Growth Drivers and Systemic Trends
The report highlighted that systemic credit growth surged to 17.7 per cent as of June 15, 2026. This acceleration was fueled by robust demand for working capital loans, attributed to higher input costs, a regulatory shift from the loan-to-deposit ratio to the liquidity coverage ratio and net stable funding ratio, and increased corporate borrowings following a rise in bond yields during the first quarter of FY27.
MOSFL noted that the Reserve Bank of India's decision to exempt FCNR(B) deposits with tenures of three to five years from cash reserve ratio and statutory liquidity ratio requirements has enhanced the attractiveness of the scheme for banks.
Impact of Regulatory Changes and Foreign Inflows
“The measure alone is expected to generate USD 40-50 billion of foreign exchange inflows in FY27 and should support overall business growth,” the report stated. According to MOSFL, yields on fresh loans increased by 6 basis points for public sector banks and declined by 7 basis points for private banks, resulting in a net 1 basis point increase for the banking sector in May 2026.
Net Interest Margins and Asset Quality Outlook
The report described the outlook for net interest margins as mixed, with a negative bias for mid-sized banks. It added that the impact of earlier repo rate cuts on external benchmark-linked loans has largely been absorbed, as the repo rate has remained unchanged over the past six months. “Going forward, movements in asset yields are expected to be driven primarily by changes in the product mix and residual deposit repricing,” the report said.
Asset quality remains healthy across most segments, with no immediate impact from the West Asia conflict. However, higher input costs and pressure on operating margins could affect borrower profitability.
Future Credit Growth Projections
MOSFL expects credit growth to remain supported by a recovery in corporate lending, steady retail loan demand, and continued growth in MSME and gold loans. “Accordingly, we expect systemic credit growth at around 14 per cent in FY27,” the report concluded.
