India’s banking sector is expected to maintain healthy growth in FY27, supported by robust liquidity, stronger credit growth, stable margins and benign asset quality, though potential policy tightening could moderate momentum later in the year, Bernstein said. | Photo Credit: iStockphoto

The Indian banking sector is expected to sustain healthy growth in FY27, supported by robust liquidity conditions and a recovery in nominal credit growth, although potential policy tightening could moderate momentum later in the year, according to global equity research and brokerage firm Bernstein.

“Margin outlook remains stable, with deposit repricing largely behind us and any rate hikes likely to provide an incremental boost to NIMs (net interest margins). Asset quality is expected to remain benign, supporting stable credit costs and earnings resilience.” said Bernstein Analysts’ Pranav Gundlapalle, Ishan Mittal and Anirudh Gupta in a report.

Within the sector, PVBs (private sector banks) are likely to continue narrowing the growth gap with PSBs (public sector banks), while the latter’s greater reliance on borrowings could weigh on relative margin performance, per their assessment.

The firm said growth momentum improved meaningfully during the quarter, with system credit growth accelerating to 20% year-on-year (YoY) (or 18% adjusted for reporting changes), while deposit growth (16 per cent in July 2026) continued to lag. As a result, the banking system’s LDR (loan-to-deposit ratio) at 82 per cent in July 2026 remained close to decadal highs, the analysts said.

The Analysts assessed that the Indian financial sector, at an aggregate level, appears to be in a sweet spot, with loan growth at an over-four-year high, margin risks easing with improving system liquidity, and asset quality continuing to be benign despite macro volatility.

“Coupled with undemanding valuations, the setup looks compelling. The bigger debate, more so than the macro backdrop, is around intra-sector dynamics, with private banks yet to see a meaningful recovery in market share while PSBs are starting to see their relative outperformance wane,” they said.

The report emphasised that India’s macro backdrop remains broadly supportive, driven by resilient growth, easing financial conditions and an improving external sector outlook.

The analysts opined that while rising inflation, a wider trade deficit, and persistent geopolitical uncertainties remain key risks, robust services exports and strong capital inflows, aided by the RBI’s Forex measures, have helped strengthen external balances and maintain abundant banking system liquidity.

As a result, market rates have softened, providing a supportive operating environment for the financial sector despite continued global uncertainties.

The analysts noted that the banking sector witnessed a sharp acceleration in credit growth during the quarter (Q1FY27), led by broad-based strength across industrial, services, and select retail segments, even as deposit growth continued to lag, keeping system LDRs elevated.

“Margin trends remained stable, supported by plateauing lending and deposit rates, easing CD (certificate of deposit) funding conditions and margin-accretive incremental lending.

“Asset quality remained benign with further improvement in already low credit costs. As a result, sector profitability stayed near decadal highs, although elevated macro and external uncertainties continued to weigh on valuations,” they said.

The analysts said PVBs continued to gain ground on both loans and deposits, with stronger loan growth narrowing the gap with PSBs to 1 percentage point (pp) and better deposit mobilisation widening their deposit growth advantage to 4 percentage points (pp). This translated into continued market share gains for PVBs on both the balance sheet and the income statement.

PSBs, however, outperformed on profitability metrics, delivering NII growth 4pp higher than PVBs despite a greater reliance on borrowings. Better margin performance, aided by stronger growth in higher-yielding retail segments, remained a key driver of this outperformance.

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