1 week ago
Indian Banks Face Healthy FY27 Outlook Despite Policy Risks
Bernstein thinks Indian banks could have a good year in FY27.
Banks are making more loans, and credit growth has become stronger.
However, deposits are not growing as quickly as loans.
This has pushed the loan-to-deposit ratio close to a decade high.
Bank profit margins are expected to remain stable because deposit rates have mostly adjusted already.
The quality of bank loans is also considered healthy, so banks may not face many bad-loan costs.
Private banks are catching up with public banks in loan and deposit growth.
Public banks still performed better on some profit measures.
Possible policy tightening, inflation, trade pressures, and geopolitical uncertainty could slow growth later.
Bernstein expects Indian banks to sustain healthy growth in FY27, supported by strong liquidity and recovering nominal credit growth.
System credit growth accelerated to 20% year-on-year, or 18% after reporting adjustments, while deposit growth reached 16% in July 2026.
The loan-to-deposit ratio stood at 82%, near decade highs, as lending continued to outpace deposit mobilization.
Margins and asset quality remain stable, with low credit costs helping keep sector profitability near decade highs.
Private banks are narrowing their growth gap with public banks, while public banks continue to lead on some profitability measures.
- Who
- Bernstein analysts Pranav Gundlapalle, Ishan Mittal, and Anirudh Gupta assessed the outlook for Indian banks.
- What
- The Indian banking sector is projected to maintain healthy growth in FY27, although policy tightening could moderate momentum later in the year.
- Where
- India.
- When
- The assessment concerns FY27 and was published on August 25, 2026; the report cites July 2026 deposit data and Q1FY27 performance.
- Why
- Robust liquidity, recovering credit growth, stable margins, benign asset quality, and supportive macroeconomic conditions are expected to support banks.
Private-Bank Growth Momentum
Public-Bank Profitability
Loan and deposit growth
Private-Bank Growth Momentum
Private-sector banks are gaining ground in both loans and deposits, narrowing the loan-growth gap with public-sector banks and widening their deposit-growth advantage.
Public-Bank Profitability
Public-sector banks remain important competitors, although Bernstein says their relative outperformance is beginning to wane.
Profit performance
Private-Bank Growth Momentum
Private banks continued to gain market share on both their balance sheets and income statements.
Public-Bank Profitability
Public-sector banks delivered net interest income growth 4 percentage points higher than private-sector banks, supported by stronger margins and higher-yielding retail lending.
Funding and margins
Private-Bank Growth Momentum
Private banks’ stronger deposit mobilization supports their growth position.
Public-Bank Profitability
Public-sector banks’ greater reliance on borrowings could weigh on their relative margin performance, despite their recent profitability outperformance.
Key facts
- Credit growth
- System credit growth accelerated to 20% year-on-year, or 18% adjusted for reporting changes.
- Deposit growth
- Deposit growth was 16% in July 2026 and continued to lag credit growth.
- Loan-to-deposit ratio
- The banking system’s loan-to-deposit ratio was 82% in July 2026, close to decade highs.
- Margins
- Margins were assessed as stable, with deposit repricing largely completed and easing certificate-of-deposit funding conditions.
- Asset quality
- Asset quality remained benign, with already low credit costs improving further.
- Private-bank growth
- Private banks narrowed the loan-growth gap with public banks to 1 percentage point and held a 4-percentage-point deposit-growth advantage.
- Key risks
- Potential policy tightening, rising inflation, a wider trade deficit, geopolitical uncertainty, and continued global uncertainty could weigh on momentum or valuations.
Quotes
Pranav Gundlapalle, Ishan Mittal and Anirudh Gupta
Bernstein analysts who authored the report on India’s banking-sector outlook.
“Coupled with undemanding valuations, the setup looks compelling. The bigger debate, more so than the macro backdrop, is around intra-sector dynamics, with private banks yet to see a meaningful recovery in market share while PSBs are starting to see their relative outperformance wane.”
thehindubusinessline.com
“Margin outlook remains stable, with deposit repricing largely behind us and any rate hikes likely to provide an incremental boost to NIMs (net interest margins). Asset quality is expected to remain benign, supporting stable credit costs and earnings resilience.”
thehindubusinessline.com
Sources
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