Bank deposit growth may hit 16% in FY27 on forex inflows

Deposit growth in the Indian banking sector is expected to accelerate to 16% in FY27, supported by inflows through foreign currency non-resident bank (FCNR-B) deposits, before moderating to 11-12% in the following two years, according to a report by Jefferies.

“We see bank credit growth normalising from 18% to 16% in FY27, then to 13% in FY28-29,” the report said.
Assessing the sector's financial position, the brokerage said Indian banks were on a "sound foundation", supported by strong asset quality and improving credit growth. However, it noted that banks were seeing differences in their ability to attract retail deposits.

The report, based on an analysis of FY26 annual reports of Indian banks, said retail deposits across the sector grew 11% year-on-year in FY26, in line with overall deposit growth. Retail deposits account for around 60% of the banking sector's total deposits.
“Growth for large banks (we cover) ranged between 10% and 15% & for smaller banks between 15% and 25%,” the report said. Growth in current and savings account (CASA) deposits, however, was lower at 10%.

The report also said loan growth across the banks covered improved from 11% in FY25 to 15% in FY26, driven by corporate lending, gold loans and steady growth in loans to small and medium enterprises.
On asset quality, the brokerage said the sector's net non-performing asset ratio fell to 0.4% in FY26, its lowest level in two decades. The slippage ratio also stood at a two-decade low of 1.1 % of loans outstanding in the previous year.

Jefferies also observed that "investments in Tech/ AI are taking precedence over branch expansion." Branch networks grew just 3 % in FY26, the slowest pace in four years, while technology costs accounted for around 10% of operating expenses.
Looking ahead, the transition to expected credit loss-based provisioning from FY28 could raise credit costs by 10-20 basis points. The next wage settlement may also increase expenses at public sector banks in FY28-29.

On the positive side, Jefferies expects a 75-basis-point repo rate hike to support bank margins, particularly for public sector lenders and large private banks. However, banks may need to manage these additional costs while sustaining growth and profitability. - ANI