Strong credit demand, margin recovery to support Indian banks' profitability in FY27: BCG
New Delhi, October 27
India's banking sector is expected to maintain resilient profitability in FY27, even as rising geopolitical risks pose challenges, according to a report by Boston Consulting Group.
"Credit demand, margin recovery and benign asset quality support a resilient profitability outlook for FY27," it said.
The report noted that with West Asia accounting for 14-20 per cent of India's trade, rising oil prices could widen the current account deficit (CAD), fuel inflation and weaken consumption, posing risks to several sectors.
This could adversely affect banking sector credit growth and potentially lead to increased loan slippages across various sectors.
However, it noted, "Credit growth should hold in the high teens through FY27, with demand broadening as GST rate cuts feed consumption, government capex sustains corporate drawdowns and ECLGS 5.0 pulls mid-market lending," it said.
The report highlighted that net advances in the banking sector grew 18 per cent year-on-year (YoY) in Q1 FY27. This was driven by 20 per cent growth in corporate and other loans, 19 per cent in MSME lending, 18 per cent in agriculture and 14 per cent in retail loans, with the credit-deposit (CD) ratio standing at 85 per cent.
On the other hand, overall deposits grew 12 per cent YoY, with current account and savings account (CASA) deposits rising 10.1 per cent and term deposits increasing 12.9 per cent. However, the industry's CASA ratio declined to 35.5 per cent from 36.1 per cent in Q1 FY26.
"Deposit growth lags credit and the CASA mix keeps slipping, yet a lower cost of funds should carry NIM higher as term deposits reprice down," it said.
Apart from this, it highlighted major key trends shaping India's banking sector in Q1 FY27, including the growing adoption of artificial intelligence (AI) and changes in Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits.
It noted that while AI adoption has expanded across core banking functions, governance, board oversight, model monitoring and audit mechanisms remain inadequate.
On the other hand, regulatory relaxations have strengthened FCNR(B) deposit inflows, shifting the focus towards liquidity management and repayment planning for 2029-31.
At the same time, the sector's profitability is expected to remain supported by strong provision coverage and low credit costs, although rising stress in the micro, small and medium enterprises (MSME) segment remains a key concern.
— ANI
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