Indian banks are entering a phase of moderated expansion, with credit growth expected to cool to 12-13 per cent in FY2026-27 from 15.9 per cent in FY26, driven by demand-side cooling and supply-side constraints as lenders navigate a tightening liquidity environment, according to Way2Wealth's thematic report.
Deposit growth is projected to stabilise and improve marginally to match credit growth at 12-13 per cent by FY27, though the traditional reliance on low-cost savings faces significant structural pressure. It added that the deposit challenge is not a temporary imbalance that will self-correct when credit growth slows. It reflects a permanent structural shift in India's financial savings landscape.
Household financialisation is irreversible, India's 18 crore-plus demat accounts, Rs 32,000-plus crore monthly systematic investment plan (SIP) flows, and a digitally-native younger generation will not return to passive fixed deposit investing, the report said.
The credit-deposit (CD) ratio, a key metric of banking health, is expected to ease from current levels of 82 per cent to approximately 79-80 per cent by March 2027, described in the report as a gradual normalisation rather than a sharp correction. However, a system-wide CD ratio crossing the 85 per cent mark would likely trigger macro-prudential action or guidance from the Reserve Bank of India (RBI).
Net interest margins (NIMs) are projected to face compression of 10-15 basis points (bps) in FY26, with a partial recovery anticipated in FY27 as deposits reprice lower with a lag and potential rate hikes expand yields. The current account savings account (CASA) ratio is expected to remain depressed between 35-38 per cent as structural disintermediation continues.
The report flagged several risks to monitor, including potential stress in the small finance bank (SFB) sector, where high CD ratios and microfinance non-performing assets (NPAs) create a volatile mix. A spike in wholesale funding costs or a government hike in small savings rates could further intensify competition for retail deposits.
"The broader systemic message is clear: Indian banks must transition from being passive recipients of household savings to active competitors in the financial savings marketplace. The era of cheap, abundant CASA is over. The era of deposit strategy as a core competitive differentiator has begun," the report noted.
The mandate for the industry, it added, is to build sticky retail ecosystems through innovative products such as SIP-equivalent recurring deposits and salary mandates to preserve lending flexibility and regulatory buffers. |
