New Delhi

Indian banks are expected to see an improvement in the credit-to-deposit (CD) ratio in FY27, led by public sector banks (PSBs), while overall credit growth is likely to remain steady at around 14 per cent year-on-year, according to a report by Motilal Oswal Financial Services (MOSFL).

The report said systemic credit growth rose to 17.7 per cent as of June 15, 2026. The growth was driven by strong demand for working capital loans due to higher input costs, a regulatory shift from the loan-to-deposit ratio (LDR) to the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), and higher corporate borrowings following the rise in bond yields during the first quarter of FY27.

MOSFL also said the Reserve Bank of India's (RBI) decision to exempt FCNR(B) deposits with a tenure of three to five years from cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements has made the scheme more attractive for banks.

"The measure alone is expected to generate USD 40-50 billion of foreign exchange inflows in FY27 and should support overall business growth," the report said.

According to the report, yields on fresh loans increased by 6 basis points (bp) for public sector banks and fell by 7 bp for private banks, resulting in a 1 bp increase for the banking sector in May 2026.

The report said the outlook for net interest margins (NIMs) remains mixed, with a negative bias for mid-sized banks. It added that the impact of earlier repo rate cuts on external benchmark-linked loans has largely been absorbed as the repo rate has remained unchanged over the past six months.

"Going forward, movements in asset yields are expected to be driven primarily by changes in the product mix and residual deposit repricing," the report said.

The report said asset quality remains healthy across most segments, with no immediate impact from the West Asia conflict. However, higher input costs and pressure on operating margins could affect the profitability of borrowers.

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MOSFL expects credit growth to remain supported by a recovery in corporate lending, steady retail loan demand, and continued growth in MSME and gold loans.

"Accordingly, we expect systemic credit growth at around 14 per cent in FY27," the report said.