Bank Deposit Growth to Surge to 16% by FY27, Predicts Jefferies
Jefferies predicts Indian bank deposit growth will accelerate to 16% by FY27, driven by FCNR-B inflows, amidst strong asset quality.
The Indian banking sector is poised for a significant boost in liquidity, with bank deposit growth expected to accelerate to 16 per cent by FY27. According to a recent report by brokerage firm Jefferies, this surge will be primarily driven by inflows through foreign currency non-resident bank (FCNR-B) deposits. However, this peak is expected to be temporary, as growth is projected to moderate to between 11 per cent and 12 per cent in the subsequent two years.
Credit Growth and Sector Stability
While deposits are set for a climb, Jefferies anticipates a normalization in bank credit growth. The report suggests that credit growth will move from 18 per cent down to 16 per cent in FY27, further cooling to 13 per cent during FY28-29.
Despite these shifts, the brokerage maintains that Indian banks are operating on a "sound foundation." This stability is underpinned by improving credit growth and exceptionally strong asset quality across the board.
The Retail Deposit Landscape
An analysis of FY26 annual reports reveals a nuanced picture of how banks are attracting funds. Retail deposits, which make up approximately 60 per cent of the total deposits in the banking sector, grew by 11 per cent year-on-year in FY26.
There is, however, a visible disparity in growth based on the size of the institution:
- Large Banks: Experienced growth ranging between 10 per cent and 15 per cent.
- Smaller Banks: Saw a more aggressive growth trajectory, ranging from 15 per cent to 25 per cent.
In contrast, growth in current and savings account (CASA) deposits remained more subdued, recording a 10 per cent increase.
Loan Trends and Asset Quality Milestones
The sector has seen a healthy uptick in lending. Loan growth among the banks covered by Jefferies rose from 11 per cent in FY25 to 15 per cent in FY26. This expansion was fueled by three primary drivers: corporate lending, gold loans, and consistent growth in loans provided to small and medium enterprises (SMEs).
Perhaps the most striking finding is the state of asset quality. The net non-performing asset (NPA) ratio plummeted to 0.4 per cent in FY26, marking the lowest level seen in two decades. Similarly, the slippage ratio reached a 20-year low, standing at 1.1 per cent of outstanding loans.
Digital Shift: Tech Over Bricks
The report highlights a strategic pivot in how banks are expanding. There is a clear trend where investments in Technology and Artificial Intelligence (AI) are now taking precedence over physical branch expansion. This is evidenced by the fact that branch networks grew by only 3 per cent in FY26—the slowest growth rate in four years.
Technology costs have become a significant part of the balance sheet, accounting for roughly 10 per cent of total operating expenses.
Future Challenges and Opportunities
While the outlook is generally positive, Jefferies points toward several upcoming headwinds:
- Provisioning Costs: The transition to expected credit loss-based provisioning starting in FY28 could increase credit costs by 10 to 20 basis points.
- Labor Expenses: Public sector banks may face increased expenses in FY28-29 due to upcoming wage settlements.
On the flip side, the brokerage expects a 75-basis-point repo rate hike to provide a boost to bank margins, a benefit that will be particularly felt by large private banks and public sector lenders. The key for these institutions will be balancing these rising operational costs while maintaining their growth momentum and profitability.