Indian Banks’ Credit Growth to Strengthen in FY27; NIM Recovery Remains Key: Equirus

Indian banks are expected to experience stronger credit growth during FY27, supported by healthy corporate borrowing, higher working capital requirements and improving retail loan disbursements. However, the pace of recovery in net interest margins (NIMs), changes in deposit costs and the sustainability of retail and unsecured lending will remain important factors influencing the sector’s earnings performance. According to a mid-quarter review by brokerage firm Equirus, banks entered the second quarter of FY27 with strong capital positions and stable asset quality, while deposit costs appeared to be approaching their lowest levels. These conditions provide a supportive foundation for business expansion, although profitability may vary across lenders depending on their loan portfolios, funding structures, deposit mobilisation and pricing strategies.

Corporate lending emerged as a major contributor to sequential credit growth during Q1 FY27. The increase was supported by higher demand for working capital, a shift among certain corporate borrowers from bond-market funding to bank loans and a gradual improvement in regular capital expenditure. As companies increase their borrowing requirements for operational activities and investment, banks may continue to benefit from sustained demand for corporate credit. Improved retail loan disbursements were also reported by some lenders, indicating a broader recovery in credit demand. Nevertheless, banks will need to maintain appropriate lending standards while expanding their loan books, particularly in segments where borrower-level risks may be comparatively higher.

The performance of net interest margins remained mixed across different categories of banks. Mid-sized private sector banks and public sector banks recorded sequential improvement in margins, while most large private sector banks experienced some compression. ICICI Bank was identified as an exception among large private lenders. Margin pressure at certain banks was associated with faster growth in relatively lower-yielding corporate loans and a reduction in lending spreads. This indicates that stronger credit growth may not automatically result in proportionate earnings improvement if a significant share of incremental lending is directed towards lower-margin corporate accounts.

Funding costs remained broadly stable for large private sector banks and public sector lenders, despite moderation in current account and savings account ratios. A lower CASA ratio can increase reliance on relatively expensive term deposits and potentially affect overall funding expenses. Although deposit costs appear close to bottoming out, the extent of future margin improvement will depend on deposit repricing, lending rates, competitive intensity and the composition of individual banks’ loan portfolios. Lenders with an appropriate mix of retail and corporate credit, along with a stable low-cost deposit base, may be better positioned to protect their margins.

Net interest margin recovery during the second half of FY27 will be a key determinant of banking-sector earnings. Banks may continue to receive support from improving loan demand, but earnings expansion will depend on whether they can convert higher credit growth into better interest income without significantly increasing funding costs. Intense competition for deposits and high-quality borrowers could restrict the ability of lenders to improve spreads. Consequently, margin performance is likely to differ across banks based on their deposit franchises, lending mix, pricing discipline and ability to manage interest-rate movements.

Retail and unsecured loan growth will also require close monitoring during FY27. These segments can offer comparatively attractive yields and support margin improvement, but rapid expansion may increase credit risk if underwriting standards are weakened. Banks will therefore need to maintain a balance between business growth and asset-quality protection. The sustainability of unsecured lending will depend on borrower repayment capacity, portfolio seasoning, collection efficiency and broader economic conditions. Any deterioration in these indicators could lead to higher credit costs and affect future profitability.

A sustained recovery in corporate capital expenditure could provide further momentum to credit growth. Increased investment in manufacturing, infrastructure and business expansion may create additional demand for term loans, project finance and working capital facilities. However, the strength and durability of the corporate capex recovery remain uncertain. Its contribution to banking-sector growth will depend on the pace of project implementation, private-sector investment appetite, borrowing conditions and demand across major industries.

Overall, Indian banks are entering the next phase of FY27 with healthy capital availability, stable asset quality and supportive credit demand. These factors provide a strong base for further loan-book expansion. However, earnings recovery is expected to remain uneven across lenders. The performance of individual banks will largely depend on how effectively they manage deposit costs, protect lending spreads, maintain asset quality and balance corporate, retail and unsecured credit growth. While the banking sector’s broader growth outlook remains positive, NIM recovery will continue to be one of the most important indicators to monitor during the remainder of FY27. CA Sansaar