India's banking sector is expected to register strong earnings growth over FY26-28, driven by sustained credit expansion and healthy net interest income (NII), although near-term pressure on margins is likely to persist, according to a report by Motilal Oswal Financial Services (MOFS).
The brokerage expects the sector's earnings to grow at a compound annual growth rate (CAGR) of around 15 per cent during FY26-28. Private sector banks are projected to outperform public sector lenders, with earnings expected to grow at a CAGR of around 20 per cent over the period.
MOFS said credit growth is expected to remain in the mid-to-high teens in FY27, supported by broad-based demand across corporate, services and industrial segments. Lending to the corporate sector rose 18.7 per cent year-on-year in May 2026, while credit to the services sector increased 19.1 per cent.
The report said industrial credit growth has accelerated from mid-single digits 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).
RBI Support Continues
According to the report, the Reserve Bank of India's recent liquidity measures, along with stronger foreign capital inflows, are expected to support the banking system. MOFS estimated that the RBI's relaxation of norms for Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits and overseas borrowings could attract USD 40-50 billion in foreign exchange inflows, equivalent to around 1.5-1.8 per cent of aggregate banking system deposits.
The report noted that deposit growth continues to lag credit expansion. 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, resulting in the banking system's loan-to-deposit ratio rising to a record high of around 83.4 per cent.
Margins Under Pressure
MOFS said net interest margins (NIMs) are expected to remain under pressure in the first quarter of FY27 as the impact of earlier policy rate cuts continues to weigh on lending yields, while deposit rates remain elevated. It added that the increasing share of wholesale and MSME lending may limit banks' ability to improve pricing.
The brokerage also noted that some mid-sized banks raised deposit rates during the quarter, while the decline in the current account savings account (CASA) ratio across the industry is expected to increase the overall cost of deposits.
Despite the near-term headwinds, MOFS said it remains constructive on the sector's medium-term outlook, citing the potential easing of borrowing costs and the possibility of rate hikes towards the end of FY27 as supportive factors for margins and earnings growth. |
