Indian banks are expected to see stronger credit growth in the coming quarters, supported by improving corporate loan demand and a gradual revival in capital expenditure, brokerage firm Equirus said in its latest review of the banking sector. The brokerage, however, noted that the pace of recovery in net interest margins (NIMs), the sustainability of retail and unsecured loan growth and the movement in deposit costs will remain crucial for banks' earnings performance in FY27.
In its mid-quarter assessment of the first set of banking results for the first quarter of FY27, Equirus said the sector was entering the second quarter from a position of strength. Asset quality remained stable, capital positions were strong and deposit costs appeared to be nearing their bottom, providing a supportive base for further growth.
"Entering 2QFY27, asset quality and capital remain strong, while deposit costs appear close to bottoming," the brokerage said in its report. According to Equirus, the focus in the coming months will increasingly shift towards the trajectory of NIM recovery, particularly in the second half of FY27. The brokerage said banks' earnings outlook would depend significantly on whether margins begin to recover at a steady pace. While deposit costs are showing signs of stabilisation, margin improvement will also be determined by the mix of loans being added to banks' books and the level of competition in the lending market.
Corporate loans emerged as the main driver of sequential credit growth during the quarter, the brokerage said. Higher working capital requirements among companies contributed to the increase in demand for bank credit. Equirus also pointed to a shift from bond market borrowings to bank loans, along with a gradual improvement in regular capital expenditure, as factors supporting corporate credit growth.
The brokerage said the trend could continue if economic activity and business investment gather further momentum. However, it cautioned that a sustained recovery in corporate capital expenditure would be necessary to maintain the current pace of loan growth.
Retail loan disbursements also improved at some banks during the quarter, indicating a gradual strengthening in demand from the retail segment. Equirus said retail credit would remain an important growth area for banks, but added that unsecured lending and asset quality would need close monitoring.
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The brokerage noted that net interest margin trends remained mixed across lenders. Mid-sized private sector banks and public sector banks reported sequential improvement in margins, while most large private banks witnessed a decline. ICICI Bank was an exception among the large private sector lenders.
Equirus attributed the margin pressure at several large private banks to faster growth in corporate loans, which generally carry lower lending spreads, and a decline in overall lending yields. As a result, the brokerage said the pace and durability of NIM recovery would be one of the most important factors determining earnings growth in FY27.
Funding costs remained broadly stable for large private and public sector banks, despite some moderation in CASA ratios. Equirus said deposit costs appeared close to bottoming out, although competitive pressure for deposits could still influence future margins.
Overall, Equirus said banks were entering the next phase of FY27 with strong capital buffers and stable asset quality. While this creates a favourable foundation for credit expansion, the earnings recovery is likely to remain uneven across lenders. Banks that successfully balance loan growth, deposit mobilisation, margins and asset quality are expected to be better positioned to benefit from the next phase of the credit cycle.
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