Private Lenders To Outpace PSUs As Credit Demand Soars: Report

New Delhi, Jul 11 (KNN) India’s banking sector is expected to witness a strong recovery in earnings over the next few years, with profits projected to grow at a compound annual growth rate (CAGR) of around 15 per cent between FY26 and FY28, according to a report by Motilal Oswal Financial Services (MOFS).

The report attributed the outlook to sustained credit growth and steady expansion in net interest income, with private sector banks likely to outperform their public sector counterparts during this period, ANI reported.

Credit Growth Remains Strong

The report noted that credit growth is expected to stay in the mid-to-high teens in FY27, supported by broad-based demand across sectors. Lending to corporates and services grew by 18.7 per cent and 19.1 per cent, respectively, in May 2026, while credit to the industrial sector has accelerated to mid-teen levels since late 2025.

The growth has been driven by higher bond yields and increased working capital requirements among large companies, mid-sized firms and micro, small and medium enterprises (MSMEs), it added.

Liquidity Support and Capital Inflows

MOFS said recent measures by the Reserve Bank of India (RBI), along with higher foreign capital inflows, have supported liquidity conditions. Easing norms on foreign currency deposits and overseas borrowings are expected to bring in an additional USD 40–50 billion, contributing modestly to overall deposit growth.

Deposit Growth Lag & Margin Pressures

Despite strong lending activity, deposit growth has remained relatively slower at around 10–12 per cent year-on-year in 2026. This has pushed the loan-to-deposit ratio (LDR) to a record high of about 83.4 per cent, indicating tighter funding conditions within the system.

RBI’s easing on Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits and overseas borrowings could bring in USD 40–50 billion in forex inflows (about 1.5–1.8 per cent of total deposits), the report noted. 

MOFS expects net interest margins (NIMs) to stay under pressure in Q1 FY27 as lending rates remain unchanged while earlier rate cuts weigh on margins.

With credit growth led by wholesale and MSME lending, banks may struggle to improve pricing power. Elevated deposit rates—especially at mid-sized banks—and a falling current account savings account (CASA) ratio are likely to raise funding costs, the report noted.

Medium-Term Outlook Positive

While NIMs may remain under near-term pressure, the outlook is positive over the medium term, aided by potential easing in borrowing costs and possible rate hikes by end-FY27, MOFS said, adding that banking sector earnings are expected to grow at ~15 per cent CAGR in FY26–28, with private banks (around 20 per cent CAGR) outperforming public sector banks.

(KNN Bureau)