Banks’ Credit Growth Seen At 14% In FY27; PSBs To Drive CD Ratio Gains: MOSFL

New Delhi, Jul 6 (KNN) Indian banks are expected to see an improvement in the credit-to-deposit (CD) ratio in FY27, led by public sector banks (PSBs), while overall credit growth is likely to remain steady at around 14 per cent year-on-year (YoY), according to a report by Motilal Oswal Financial Services Ltd. (MOFSL).

The report said systemic credit growth rose to 17.7 per cent as of June 15, 2026, driven by strong demand for working capital loans amid higher input costs, a regulatory shift from the loan-to-deposit (LDR) ratio to the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), and higher corporate borrowings following a rise in bond yields during the first quarter of FY27.

FCNR(B) Exemption

MOSFL noted that the Reserve Bank of India's (RBI) decision to exempt FCNR(B) deposits with a tenure of three to five years from cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements has made the scheme more attractive for banks, ANI reported.

“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 said.

Yields and Margins

According to the report, yields on fresh loans rose by 6 basis points (bps) for PSBs and fell by 7 bps for private banks in May 2026, resulting in a net 1 basis point increase for the banking sector. 

The outlook for net interest margins (NIMs) remains mixed, MOSFL said, with a negative bias for mid-sized banks, adding 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 noted.

Asset Quality and Outlook

The report highlighted that asset quality remains healthy across most segments, with no immediate impact from the West Asia conflict, though higher input costs and pressure on operating margins could affect borrower profitability. 

Credit growth is expected to be supported by a rebound in corporate lending, steady retail demand, and continued expansion in MSME and gold loans, MOSFL noted.

"Accordingly, we expect systemic credit growth at around 14 per cent in FY27," the report said.

(KNN Bureau)