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India Ratings has raised its FY27 bank credit growth forecast to 15% from its earlier estimate of 13%, citing expectations of stronger corporate working capital lending and improved deposit mobilisation through FCNR(B) deposits. However, the rating agency expects profitability to come under pressure as banks prepare for the Expected Credit Loss provisioning framework. Credit costs are projected to rise to 0.74% in FY27 from 0.65% in FY26, while system-wide return on assets is expected to decline to 1.31%. Deposit growth is also forecast to improve, though the loan-deposit ratio remains a concern.
India Ratings has revised its FY27 bank credit growth estimate upward to 15% from 13%, although the forecast remains below the current 19.3% year-on-year growth recorded as of July 31.
The agency said the higher credit growth expectation is linked to a greater share of corporate lending for working capital requirements. Benefits from the cash reserve ratio on deposits raised from the diaspora are expected to support lending, while tighter bond yields could make bank borrowing more attractive for non-banking finance companies (NBFCs).
Despite stronger credit growth and the share of dud assets remaining at historically low levels, banks are expected to face pressure on profitability. India Ratings expects credit costs to rise to 0.74% in FY27 from 0.65% in the previous fiscal because of additional provisioning requirements under the Expected Credit Loss (ECL) framework.
Ankit Jain, associate director at India Ratings, said the transition to ECL norms could affect the banking sector through a one-time balance sheet impact as well as higher steady-state credit costs due to increased provisioning requirements for Stage 1 and Stage 2 assets.
According to India Ratings' FY27 Mid-Year Banking Outlook report, credit costs for the banking sector had declined sharply to 0.65% in FY26 from 4.19% in FY18. The decline was supported by a benign credit environment, corporate deleveraging following the COVID period, strong provisioning against legacy NPAs and improvements in risk management practices.
System-wide return on assets (ROA) is consequently expected to decline by 0.06 percentage points year-on-year to 1.31% in FY27. Public sector banks are likely to experience greater pressure than private lenders because of their lower provisioning buffers. However, part of the impact could be offset by capital released through revised risk-weight asset requirements.
Deposit growth has continued to trail credit growth, averaging about 3.80 percentage points lower since FY22. This has pushed the loan-deposit ratio (LDR) to 84.8% in the first quarter of FY27 from 71.7% in FY22.
India Ratings said the elevated LDR has remained a structural concern over the past two years. RBI measures relating to FCNR(B) deposits are expected to attract additional deposits and help bring down LDRs, although the relief is likely to be temporary.
After factoring in FCNR(B) deposits, the agency has raised its FY27 deposit growth forecast to nearly 13.6% year-on-year from its earlier estimate of 11.4%.
For NBFCs, the report expects a greater focus on maintaining collection momentum and asset quality rather than expanding loan portfolios. The sector is facing several domestic and global challenges, including an uneven monsoon, slower economic growth, global market volatility and rising inflation.
NBFCs are also expected to face margin pressure in FY27 because of volatile and elevated interest rates, with limited scope to increase lending rates.
The report also expects the Trade Receivables Electronic Discounting System (TReDS) platform to grow by at least 10-15% over the next two to three years as government receivables are brought onto the platform.
Jatin Nanaware, senior director and head of structured finance, said guarantee schemes could encourage greater participation in TReDS by giving buyers more confidence to accept receivables from lower-rated obligors. He added that some of these receivables could eventually enter securitisation products, with credit enhancement or guarantees helping package receivables involving lower-rated obligors.
Source PTI
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