Projected Growth in Credit and Deposits
Financial analysts anticipate that banks will exhibit a double-digit year-on-year growth in both credit and deposits in the first quarter of FY27. Notably, larger lenders, particularly private banks, may experience a decrease in their net interest margins (NIM).
According to research from brokerage firm Motilal Oswal, the growth of bank credit surged to 17.7% as of June 15, fueled by several factors. These include an uptick in demand for working capital loans due to rising input costs, a regulatory shift prioritizing liquidity coverage and net stable funding ratios over credit-deposit ratios, and increased corporate borrowing spurred by rising bond yields during the quarter.
The brokerage forecasts that credit growth will likely moderate to approximately 14% by the end of FY27.
Deposit Trends and Competition
Analysis indicates that system-wide deposit growth is robust, clocking in at 12% year-on-year, largely supported by strong credit expansion and a notable increase in the money multiplier. Nonetheless, deposit growth lags behind loan growth, leading to heightened dependence on wholesale deposits.
Despite the healthy growth, intense competition for deposits poses ongoing challenges for banks as they strive to mobilize low-cost deposits effectively. Motilal Oswal projects deposit growth within a range of 0.5% to 5.1% on a sequential basis.
Implications for Net Interest Margins
Axis Securities notes that the full impact of recent repo rate cuts has already been absorbed by banks. As such, they anticipate that NIMs will reflect a shift in the product mix, with the cost of funds remaining persistently high.
The brokerage predicts that margins are likely to remain subdued and to decline quarter-on-quarter across most banking institutions, with the exception of UJSFB. They point out that public sector banks (PSBs) are expected to maintain flat NIMs quarter-over-quarter, while larger private banks may experience a margin compression of 3 to 8 basis points.
Market Sentiment Amid Global Conflicts
While banks have asserted that there has not been an immediate effect on their loan portfolios due to regional conflicts in West Asia, market participants are likely to closely watch the developments related to banks’ lending in commercial vehicles and to small and mid-sized enterprises.
As the quarter unfolds, the focus on these sectors will help gauge the broader economic impact and the ongoing stability of the banking sector amid various external challenges.
