Indian Banking Sector Positioned for Healthy Growth in FY27, Says Bernstein Report

India’s banking sector is expected to maintain healthy growth in FY27, supported by robust liquidity conditions, stronger credit growth, stable margins, and benign asset quality, according to a report by global equity research and brokerage firm Bernstein. However, analysts noted that potential policy tightening could moderate this momentum later in the year.

The report, authored by Bernstein analysts Pranav Gundlapalle, Ishan Mittal, and Anirudh Gupta, stated that the margin outlook remains stable. Deposit repricing is largely behind the sector, and any future rate hikes could provide an incremental boost to net interest margins (NIMs). Additionally, asset quality is expected to remain benign, supporting stable credit costs and earnings resilience.

Growth momentum improved during the quarter, with system credit growth accelerating to 20% year-on-year (or 18% adjusted for reporting changes). In contrast, deposit growth continued to lag, standing at 16% in July 2026. Consequently, the banking system’s loan-to-deposit ratio (LDR) remained close to decadal highs at 82% in July 2026.

Bernstein assessed that the Indian financial sector is currently in a favorable position, featuring loan growth at an over-four-year high, easing margin risks supported by system liquidity, and benign asset quality despite macroeconomic volatility.

The report highlighted intra-sector dynamics, noting that private sector banks (PVBs) are working to narrow the growth gap with public sector banks (PSBs). Meanwhile, PSBs' greater reliance on borrowings could weigh on their relative margin performance. During the quarter, PVBs continued to gain ground on both loans and deposits, narrowing the loan growth gap with PSBs to 1 percentage point and widening their deposit growth advantage to 4 percentage points.

Conversely, PSBs outperformed on profitability metrics during the period, delivering net interest income (NII) growth 4 percentage points higher than PVBs despite relying more heavily on borrowings. Better margin performance, driven by stronger growth in higher-yielding retail segments, supported this outperformance.

Bernstein emphasized that India’s broader macroeconomic backdrop remains supportive, driven by resilient growth, easing financial conditions, and an improving external sector outlook. While rising inflation, a wider trade deficit, and geopolitical uncertainties remain risks, strong services exports, robust capital inflows, and RBI forex measures have helped strengthen external balances and maintain abundant banking system liquidity.

The banking sector witnessed a sharp acceleration in credit growth during the first quarter of FY27, led by broad-based strength across industrial, services, and select retail segments. Sector profitability remained near decadal highs as credit costs stayed low, although external uncertainties continued to weigh on overall valuations.

"The findings from Bernstein indicate a resilient outlook for the Indian banking sector as it enters FY27. With credit growth reaching multi-year highs and asset quality remaining stable, financial institutions are well-positioned to support broader economic expansion. However, the widening gap between credit and deposit growth, along with elevated loan-to-deposit ratios, requires careful liquidity management by banks. Intra-sector competition between private and public sector banks will continue to shape market dynamics, making disciplined capital allocation crucial for sustained profitability." — Dr. Shishir Gupta, Founder & CEO, StartupLanes