Banking sector outlook brightens as robust credit growth, FCNR inflows and clean balance sheets to support earnings in FY27: Report

NEW DELHI: Indian banks are entering FY27 with a strong combination of robust credit demand, improving deposit mobilisation, benign asset quality, and potential monetary policy support, setting the stage for sustained earnings momentum, according to a research report by Ashika Institutional Equities.

The brokerage said that the banking sector is expected to benefit from broad-based loan growth, additional foreign currency deposit inflows, and a possible recovery in net interest income, although deposit costs and MSME asset quality will remain key monitorables.

“Banking system’s non-food credit growth and deposit growth improved to 18.6 per cent YoY and 13.3 per cent YoY, respectively, as on June 30, 2026,” the report said, adding that the current level of credit growth is the highest in over a decade, excluding the impact of the e-HDFC merger.

The domestic brokerage firm expects system credit growth to remain healthy, supported by demand across secured retail, MSME, services and select corporate segments. “System credit growth is expected to be at ~15 per cent in FY27,” it said, adding that improving deposit mobilisation should enable banks to sustain loan growth while maintaining underwriting discipline.

The special FCNR(B) deposit window is also expected to provide an additional source of funding. The report estimates US$50 billion of inflows through FCNR(B) deposits by September 2026, which could contribute around 1.8 per cent to system deposit growth. It said select large banks could see FCNR(B) fund-raising add 1-3 per cent to their deposit growth in FY27.

On margins, the report said, “the RBI is expected to hike repo rate by 25-50bps in H2FY27,” which could benefit banks with a higher share of external benchmark-linked loans. The RBI’s FCNR(B) zero-cost swap window is also expected to support margins by providing access to lower-cost funding and easing deposit mobilisation pressures.

Asset quality remains a major strength for the sector. “GNPA of Scheduled Commercial Banks (SCB) stood at 1.8 per cent in March 2026, a multi-decadal low, with NNPA at 0.4 per cent,” the report said. Strong provision coverage and low credit costs are expected to support profitability, although rising stress in the MSME segment remains a key monitorable.

“Ability to sustain deposit mobilization, protect CASA franchises, and manage incremental cost of funds (CoF) will remain key differentiators,” the report said, adding that banks with stronger deposit franchises, healthy capital positions and resilient asset quality are likely to outperform. (ANI)