India's banking sector is poised for a robust earnings recovery over the period FY26-28, with earnings projected to expand at a compound annual growth rate (CAGR) of approximately 15 per cent, driven by sustained credit growth and strong net interest income (NII), according to a report by Motilal Oswal Financial Services (MOFS).
Credit Growth Outlook
The report indicates that credit growth is expected to remain in the mid-to-high teens in FY27, with private sector banks likely to outperform their public sector counterparts during this period. MOFS attributes this positive outlook to the Reserve Bank of India's (RBI) recent relief measures, higher foreign capital inflows, and continued support for both short-term and durable liquidity.
Credit growth has remained broad-based, with lending to the corporate and services sectors growing by 18.7 per cent and 19.1 per cent, respectively, in May 2026. The industrial sector has seen an acceleration in credit growth from mid-single-digit in the first half of FY26 to the mid-teens since December 2025, driven by higher bond yields and increased working capital requirements of large corporates, mid-sized companies, and micro, small and medium enterprises (MSMEs).
Deposit Growth and Liquidity
However, deposit growth continues to lag behind credit growth. As of the latest data, deposit growth stood at 12 per cent year-on-year and has remained in the 10-12 per cent range since the beginning of calendar year 2026. Consequently, the loan-to-deposit ratio (LDR) has reached an all-time high of approximately 83.4 per cent.
The report notes that the RBI's easing measures on Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits and overseas borrowings are expected to attract USD 40-50 billion in foreign exchange inflows, equivalent to around 1.5-1.8 per cent of the banking system's aggregate deposits.
Net Interest Margins Under Pressure
MOFS expects net interest margins (NIMs) to remain under pressure in the first quarter of FY27, as lending rates have remained largely unchanged over the past six months while the full impact of earlier policy rate cuts continues to affect margins. With credit growth increasingly driven by wholesale and MSME lending, banks may face challenges in improving pricing power. Deposit rates have also remained elevated, with some mid-sized banks raising rates further during the quarter. Additionally, a decline in the current account savings account (CASA) ratio across the industry is expected to increase banks' overall cost of deposits.
"While we estimate a negative bias on NIMs in the near term, we remain constructive on the medium-term outlook, supported by a potential easing in borrowing costs and possible rate hikes by the end of FY27," the report said.
Earnings Growth Projections
MOFS expects the banking sector's earnings to grow at a CAGR of around 15 per cent during FY26-28, supported by a similar growth rate in net interest income. Private sector banks, with an expected earnings CAGR of around 20 per cent, are likely to outperform public sector banks.
