Bank credit growth to slow below 12% in FY27 as ₹25 lakh crore expansion faces oil shock, Deposit pressure: ICRA

India’s banking sector is set to enter a phase of moderated expansion in FY27, with credit growth expected to ease to 11.0–11.7%, down from a sharp 15.9% surge in FY26, according to rating agency ICRA. While the pace may cool, the absolute expansion remains substantial, with incremental credit projected at ₹23.5–25 lakh crore, taking the overall bank credit to ₹236.4–237.9 lakh crore.

The moderation comes against a backdrop of heightened geopolitical risks, particularly the ongoing conflict in West Asia, which has disrupted the Strait of Hormuz and raised concerns over oil supply and trade flows. With the region accounting for 14–20% of India’s trade, any sustained spike in crude prices could widen the current account deficit, stoke inflation and weigh on consumption—factors that may dampen credit demand across sectors.

Deposit gap, margin pressure persists

A key structural challenge remains the lag in deposit growth relative to credit expansion. Although deposit mobilisation improved towards the end of FY26, aided by aggressive fund-raising efforts by banks, it continues to trail loan growth. This imbalance has kept the system-level credit-deposit ratio elevated, even as it moderated marginally.

ICRA flagged that deposit costs are unlikely to soften materially in the near term, which will keep pressure on net interest margins (NIMs). Banks have already dipped into surplus liquidity buffers—including excess statutory liquidity ratio holdings—to sustain credit growth, leading to a decline in liquidity coverage ratios. Going forward, the ability to mobilise deposits at competitive rates will be critical for maintaining both growth and profitability.

Asset quality to remain benign, risks linger

On the asset quality front, the sector continues to show resilience. Gross non-performing assets (GNPAs) are expected to remain contained at 2.0–2.1% in FY27, despite a likely uptick in slippages driven by stress in MSMEs and unsecured retail segments.

ICRA cautioned that vulnerable sectors could face pressure from supply chain disruptions and elevated input costs. A 50-basis point increase in fresh NPAs could shave 9–10 basis points off return on assets and nearly 100 basis points off return on equity, underlining the sensitivity of bank profitability to asset quality trends.

Profitability steady despite headwinds

Despite emerging pressures, bank profitability is expected to remain healthy. Return on assets is projected at 1.2–1.3%, while return on equity may come in at 12.3–13.2% in FY27. Rising but manageable credit costs and controlled operating expenses are likely to cushion the impact of margin compression.

ICRA has maintained a “Stable” outlook on the sector, citing strong capital buffers and manageable risks, even as the operating environment turns more complex. With GDP growth estimated at 6.5% assuming crude at $85 per barrel, the banking system appears poised to sustain growth—albeit at a more measured pace.