Jefferies predicts Indian banking sector deposit growth will reach 16% in FY27, supported by FCNR-B inflows. Banks show a sound foundation with record low NPA ratios, though tech investments are now prioritized over traditional branch expansion.
Banking Sector Deposit Outlook
Deposit growth in the Indian banking sector is expected to accelerate to 16 per cent in FY27, supported by inflows through foreign currency non-resident bank (FCNR-B) deposits, before moderating to 11-12 per cent in the following two years, according to a report by Jefferies. “We see bank credit growth normalising from 18% to 16% in FY27, then to 13% in FY28-29,” the report said.
Assessing the sector’s financial position, the brokerage said Indian banks were on a “sound foundation”, supported by strong asset quality and improving credit growth. However, it noted that banks were seeing differences in their ability to attract retail deposits. The report, based on an analysis of FY26 annual reports of Indian banks, said retail deposits across the sector grew 11 per cent year-on-year in FY26, in line with overall deposit growth. Retail deposits account for around 60 per cent of the banking sector’s total deposits. “Growth for large banks (we cover) ranged between 10% and 15% & for smaller banks between 15% and 25%,” the report said. Growth in current and savings account (CASA) deposits, however, was lower at 10 per cent.
Credit Growth and Asset Quality
The report also said loan growth across the banks covered improved from 11 per cent in FY25 to 15 per cent in FY26, driven by corporate lending, gold loans and steady growth in loans to small and medium enterprises. On asset quality, the brokerage said the sector’s net non-performing asset ratio fell to 0.4 per cent in FY26, its lowest level in two decades. The slippage ratio also stood at a two-decade low of 1.1 per cent of loans outstanding in the previous year.
Tech Adoption and Future Costs
Jefferies also observed that “investments in Tech/ AI are taking precedence over branch expansion.” Branch networks grew just 3 per cent in FY26, the slowest pace in four years, while technology costs accounted for around 10 per cent of operating expenses. Looking ahead, the transition to expected credit loss-based provisioning from FY28 could raise credit costs by 10-20 basis points. The next wage settlement may also increase expenses at public sector banks in FY28-29. On the positive side, Jefferies expects a 75-basis-point repo rate hike to support bank margins, particularly for public sector lenders and large private banks. However, banks may need to manage these additional costs while sustaining growth and profitability.
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