Mumbai: Domestic brokerage Motilal Oswal Financial Services (MOFSL) has raised its FY27 credit growth forecast for India’s banking sector, citing supportive Reserve Bank of India (RBI) measures, improving liquidity and sustained demand for loans across corporate and MSME segments.

The brokerage has increased its FY27 credit growth estimate for the banks under its coverage to 14.6 per cent, up from 13.6 per cent earlier. The revised projection is also higher than the Bloomberg consensus estimate of around 14.2 per cent.

MOFSL has reiterated ICICI Bank, HDFC Bank, State Bank of India (SBI), AU Small Finance Bank and RBL Bank as its preferred banking stocks.

Private banks expected to lead loan growth

According to the brokerage, private sector banks are expected to outperform public sector lenders in terms of loan growth during FY27.

MOFSL projects:

  • Private banks: 15.8 per cent year-on-year credit growth
  • Public sector banks (PSBs): 13.7 per cent year-on-year credit growth

The brokerage noted that its projections remain above market consensus and believes there is still room for further upside, although global macroeconomic risks, including geopolitical tensions in West Asia and fluctuations in crude oil prices, will need to be monitored closely.

Strong earnings outlook for the banking sector

MOFSL expects India’s banking sector to deliver healthy earnings growth over the next three financial years.

The brokerage forecasts the sector’s earnings to grow at a compound annual growth rate (CAGR) of around 15 per cent between FY26 and FY28, supported by similar growth in net interest income (NII).

Private sector banks are expected to outperform with an estimated earnings CAGR of around 20 per cent, while PSU banks are projected to post earnings growth of about 10 per cent over the same period.

Credit demand remains broad-based

According to MOFSL, business updates for the first quarter of FY27 indicate one of the strongest phases of credit expansion in recent years.

Loan growth has remained broad-based across:

  • Corporate lending
  • Micro, Small and Medium Enterprises (MSMEs)
  • Services sector lending

Among the banks covered by the brokerage:

  • Large private banks reported 16.2 per cent year-on-year credit growth.
  • Public sector banks posted 15.1 per cent growth.
  • Mid-sized banks recorded 13.6 per cent growth.

Several small public sector banks and small finance banks also reported healthy expansion in their loan books.

Within the retail segment, gold loans continued to record strong growth, while vehicle loans remained resilient. However, credit card loan growth continued to remain relatively subdued.

Deposit growth continues to trail lending

The brokerage observed that deposit mobilisation has continued to lag behind credit growth, resulting in elevated loan-to-deposit ratios across the banking sector.

Current Account Savings Account (CASA) ratios also declined for several banks during the quarter, indicating continued pressure on low-cost funding.

MOFSL expects the RBI’s recent relaxation of norms governing Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits to help attract an estimated USD 40 billion to USD 50 billion in foreign currency inflows, improving liquidity and supporting deposit growth.

The brokerage has projected 13.8 per cent deposit growth for FY27.

Margins may remain under pressure initially

Despite the positive credit outlook, MOFSL believes net interest margins (NIMs) may remain under pressure during the first half of FY27.

The brokerage attributed this to:

  • Elevated deposit costs
  • A higher proportion of secured lending
  • Limited pricing power

However, it remains optimistic about the medium-term outlook, citing supportive RBI liquidity measures, easing bond yields and improving macroeconomic conditions as factors likely to benefit the banking sector.

Based on its outlook, MOFSL continues to recommend ICICI Bank, HDFC Bank, SBI, AU Small Finance Bank and RBL Bank as its preferred banking stocks.