Credit growth surges to 18%; mid-sized private banks likely to outperform in Q1: Motilal Oswal

India's banking sector saw a sharp acceleration in credit growth, with systemic loan growth rising to 17.7% year-on-year as of June 15, according to a report by Motilal Oswal. The brokerage expects mid-sized private banks to outperform larger peers in the first quarter of FY27, supported by stronger loan growth and stable asset quality.

The report attributed the surge in credit growth to higher demand for working capital loans amid rising input costs, a regulatory shift in focus from the loan-to-deposit ratio (LDR) to the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) framework, and higher corporate borrowings following the rise in bond yields during the first quarter of FY27.

However, Motilal Oswal expects overall credit growth to moderate to around 14% in FY27 as the current momentum normalises.

Mid-sized private banks to lead loan growth

Across its banking coverage universe, the brokerage expects loan growth of 1.2-5.4% quarter-on-quarter in Q1FY27.

Mid-sized private lenders, including AU Small Finance Bank , RBL Bank , DCB Bank , and IDFC FIRST Bank , are expected to post the strongest sequential loan growth of 3.9-5.4%. Among large private banks, ICICI Bank is projected to lead with around 4% quarter-on-quarter loan growth, outperforming peers.

Public sector banks (PSBs), meanwhile, are expected to remain relatively subdued, with loan growth of less than 3% sequentially.

Deposit growth trails credit expansion

System-wide deposit growth stood at 12% year-on-year, aided by strong credit demand and an increase in the money multiplier. However, deposits continue to grow at a slower pace than loans, pushing the credit-deposit (CD) ratio higher to 83.4% and increasing banks' reliance on wholesale deposits.

The brokerage noted that competition for deposits remains intense, making it difficult for banks to mobilise low-cost current and savings account (CASA) deposits. As a result, term deposit rates are expected to remain broadly sticky.

The report added that the government's Foreign Currency Non-Resident (FCNR) deposit route could provide temporary support for deposit mobilisation until September 2026.

Mixed outlook for margins

Motilal Oswal expects a mixed trend in net interest margins (NIMs) during Q1FY27. Among mid-sized private banks, IndusInd Bank , Federal Bank , and DCB Bank are expected to report margin expansion while HDFC Bank , ICICI Bank , and Axis Bank could see marginal moderation. Kotak Mahindra Bank is also expected to report lower margins.

Among other private lenders, NIMs are likely to contract by around 13 basis points for AU Small Finance Bank , 10 basis points for Bandhan Bank , and 14 basis points for Equitas Small Finance Bank . For PSU banks, margins are expected to remain broadly stable.

Asset quality remains healthy

The brokerage said asset quality continues to improve across the banking sector. Most banks have indicated that stress in unsecured retail loans, including personal loans and credit cards, is easing while stress in the microfinance segment is gradually returning to normal levels.

Although there has been no immediate impact from the ongoing geopolitical tensions in West Asia, Motilal Oswal cautioned that higher input costs and pressure on corporate profitability could affect some borrowers over time.

Credit costs are expected to remain stable for large private banks and benign for PSU banks.

Earnings expected to remain strong

For the banking sector under its coverage, Motilal Oswal expects:

Net interest income (NII) to grow 10.9% year-on-year and 3.5% quarter-on-quarter in Q1 FY27.

Profit after tax (PAT) to rise 9.6% year-on-year, though decline 4% sequentially due to seasonal factors.

Banks under its coverage to deliver an earnings CAGR of around 15% between FY26 and FY28.

Private banks are expected to report 10.1% year-on-year growth in PAT during the quarter, while PSU banks are likely to post 9% annual profit growth, supported by stable margins and improved treasury gains as bond yields soften.

Among financial services companies, SBI Cards is expected to report 18.8% year-on-year growth in net profit, although margins are likely to contract by around 10 basis points due to elevated credit costs.

Meanwhile, Paytm is projected to post 26% year-on-year revenue growth, driven by robust growth in gross merchandise value (GMV), with contribution margins expected to remain healthy at around 55.5%.