Business EconomyPosted at: Jul 17 2026 5:51PM


India's banking sector set to stay resilient in FY27 despite margin pressure, deposit challenges: Report

New Delhi, Jul 17 (UNI) India's banking sector is expected to remain resilient in FY27, supported by healthy capital buffers, improving asset quality and sustained credit demand, although lenders are likely to face pressure from narrowing margins and intense competition for deposits, according to a report by CareEdge Ratings.
The ratings agency expects bank credit growth to moderate to 14.5-15.5pc in FY27 after a strong expansion in FY26, as large corporates and NBFCs increasingly shift towards bond markets and external commercial borrowings (ECBs) amid improving financing conditions.
Nevertheless, credit demand is expected to remain healthy, backed by robust domestic economic activity, improving liquidity and continued government capital expenditure.
The report noted that India's banking system entered FY27 from a position of strength, with robust capitalisation, adequate liquidity and significantly improved asset quality.
While retail loans, MSMEs, infrastructure financing and lending to NBFCs are expected to remain the key growth drivers, some of the recent surge in credit demand was also due to borrowers substituting market borrowings with bank loans amid elevated bond yields.
During FY26, scheduled commercial banks recorded credit growth of around 14.5pc, outpacing deposit growth of 11.5pc, resulting in the loan-to-deposit ratio rising to 81.4 from 78.4pc a year earlier.
The widening gap has forced banks to increasingly depend on market-based funding, including certificates of deposit, while competition for retail deposits has intensified as household savings continue to diversify into mutual funds and alternative investment products.
CareEdge said banks are likely to continue facing funding pressures despite lower deposit rates, as deposit mobilisation remains a key challenge. Although lending rates have declined following RBI's monetary easing, margins could remain under pressure due to elevated funding costs and competitive pricing.
The report highlighted that asset quality improved further in FY26, with the gross non-performing asset (GNPA) ratio falling to a multi-decade low of 1.8pc, while net NPAs declined to 0.4pc. Strong underwriting standards, healthy economic growth and better borrower repayment capacity have significantly strengthened bank balance sheets. Capital adequacy also remained comfortable, with the sector's capital-to-risk weighted assets ratio (CRAR) at 17.7pc, well above regulatory requirements.
Profitability, however, moderated during FY26. Net profit growth slowed to 6pc from 14.7pc in the previous year as net interest margins compressed by 20 basis points to 3.3pc. Despite this, return on assets remained healthy at 1.3pc, supported by steady credit growth, lower credit costs and recoveries from written-off accounts.
On the NBFC front, CareEdge maintained a constructive outlook, citing stronger balance sheets, healthy credit demand and continued access to bank funding. However, it cautioned that rising dependence on bank borrowings, relatively high funding costs and stress in unsecured retail and certain MSME loan segments remain areas to watch.
The report also flagged geopolitical tensions in West Asia as a key external risk. A sustained increase in crude oil prices or renewed trade disruptions could weigh on inflation, borrower cash flows and overall financial conditions. However, CareEdge believes strong capital buffers, prudent regulatory oversight and RBI's recent measures to strengthen external stability will help the banking sector withstand potential shocks. UNI VK SAS
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Tags: #India's banking sector set to stay resilient in FY27 despite margin pressure# deposit challenges: Report
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