Indian Banking Credit Growth to Moderate to 12-13% in FY27E, Says Report

New Delhi | May 8, 2026: India’s banking sector is expected to witness slower expansion over the next two financial years as Indian banking credit growth to moderate to 12-13% in FY27E due to rising deposit pressures, liquidity constraints, and changing household investment behaviour, according to a new report by Way2Wealth.

The thematic report on India’s banking sector stated that banks are entering a phase of normalization after years of strong lending growth. Analysts believe that while the Indian banking system remains stable, structural changes in financial savings patterns are creating fresh challenges for lenders.

According to the report, Indian banking credit growth to moderate to 12-13% in FY27E as both demand-side moderation and supply-side liquidity tightening impact the pace of loan expansion.

Indian Banking Credit Growth to Moderate to 12-13% in FY27E Due to Deposit Pressures

The report highlighted that one of the biggest reasons why Indian banking credit growth to moderate to 12-13% in FY27E is the growing challenge banks face in mobilizing low-cost deposits.

Traditionally, Indian banks relied heavily on savings accounts and fixed deposits to fund lending activities. However, rising financial awareness and increasing participation in capital markets are changing household investment patterns.

The report noted that millions of Indians are now shifting their savings toward mutual funds, stock markets, and digital investment platforms instead of traditional fixed deposits.

India currently has more than 18 crore demat accounts, while monthly SIP investments have crossed Rs 32,000 crore. Analysts believe these trends are reducing the banking sector’s access to cheap deposits.

The report stated that the structural shift in household savings is likely permanent, which is one of the key reasons why Indian banking credit growth to moderate to 12-13% in FY27E.

Financialization of Savings Reshaping Banking Sector

Experts believe the financialization of household savings is transforming India’s banking landscape.

The report observed that younger and digitally connected investors are increasingly choosing market-linked investment products instead of traditional bank deposits. This changing behaviour is forcing banks to rethink their deposit mobilization strategies.

According to the report, Indian banking credit growth to moderate to 12-13% in FY27E because banks can no longer depend on passive inflows into Current Account Savings Account (CASA) deposits.

“The era of cheap, abundant CASA is over,” the report stated.

Analysts say Indian banks now need to actively compete with mutual funds, stockbroking platforms, insurance products, and digital investment services to attract customer savings.

Credit-Deposit Ratio Expected to Normalize

The report further stated that the Credit-Deposit (CD) ratio is likely to ease gradually in the coming years.

Currently, India’s banking system is operating with a CD ratio of around 82 per cent. However, experts expect the ratio to normalize to approximately 79-80 per cent by March 2027.

This moderation aligns with expectations that Indian banking credit growth to moderate to 12-13% in FY27E while deposit growth slowly catches up.

The Credit-Deposit ratio is an important indicator of banking sector health because it measures how much of a bank’s deposits are being used for lending.

Experts believe a gradual decline in the CD ratio may help improve liquidity stability across the banking sector.

RBI Monitoring Banking Liquidity Closely

The report also warned that if the system-wide Credit-Deposit ratio crosses 85 per cent, the Reserve Bank of India may take macro-prudential measures or issue regulatory guidance.

As Indian banking credit growth to moderate to 12-13% in FY27E, regulators are expected to focus more on liquidity management, funding quality, and financial stability.

Banking experts say the RBI is carefully monitoring liquidity conditions because aggressive lending growth without adequate deposits can create systemic risks.

The report indicated that Indian banks are likely to become more selective in their lending practices to maintain healthy liquidity buffers.

Net Interest Margins Likely to Face Pressure

Another major challenge highlighted in the report is the pressure on banking profitability.

The report expects Net Interest Margins (NIMs) to decline by 10-15 basis points in FY26 due to rising deposit costs and funding competition.

Although a partial recovery is expected in FY27, analysts still believe Indian banking credit growth to moderate to 12-13% in FY27E because profitability pressures may limit aggressive loan expansion.

Banks are currently facing higher competition for deposits, which is increasing interest costs. At the same time, slower loan growth could reduce interest income momentum.

Experts believe maintaining healthy margins will become one of the biggest priorities for Indian banks over the next few years.

CASA Ratios Expected to Remain Weak

The report further mentioned that Current Account Savings Account (CASA) ratios are likely to remain under pressure.

CASA deposits are considered the cheapest source of funds for banks because they carry lower interest costs compared to fixed deposits.

However, as more customers move money toward mutual funds and equity investments, banks are struggling to maintain CASA growth.

The report stated that CASA ratios are expected to remain between 35-38 per cent, reinforcing concerns that Indian banking credit growth to moderate to 12-13% in FY27E due to funding challenges.

Analysts say this shift represents a long-term structural transformation in India’s financial system.

Small Finance Banks Face Higher Risks

The report also identified significant risks for Small Finance Banks (SFBs).

According to analysts, some SFBs are vulnerable because of very high Credit-Deposit ratios and rising stress in microfinance loan portfolios.

The report warned that if funding costs rise sharply or retail deposit growth weakens further, smaller lenders could face additional financial pressure.

Experts believe the broader reason why Indian banking credit growth to moderate to 12-13% in FY27E is linked not only to large banks but also to systemic stress within smaller banking institutions.

Rising non-performing assets (NPAs) in microfinance segments may also impact investor confidence in the sector.

Competition for Deposits Intensifies

Indian banks are expected to face intense competition for retail deposits in the coming years.

The report suggested that government hikes in small savings scheme interest rates or increases in wholesale funding costs could worsen deposit competition further.

As Indian banking credit growth to moderate to 12-13% in FY27E, banks are likely to launch innovative products to retain customers and attract long-term deposits.

Experts say banks may increasingly introduce products similar to SIP-based recurring deposits, salary-linked banking services, and digital reward ecosystems to build customer loyalty.

The report emphasized that banks must transition from being passive recipients of household savings to active competitors in India’s broader financial savings market.

Technology and Innovation Become Critical

Analysts believe technology and customer engagement will become critical for banking sector growth.

As Indian banking credit growth to moderate to 12-13% in FY27E, banks are expected to invest more heavily in digital banking platforms, AI-driven customer services, and personalized financial products.

The competition between banks, fintech companies, and investment platforms is intensifying rapidly.

Experts say future banking success will depend on how effectively banks can create “sticky” customer ecosystems that encourage long-term financial relationships.

Digital banking, wealth management services, and integrated financial products are likely to become major competitive differentiators.

Indian Banking Sector Still Remains Stable

Despite the challenges, analysts stressed that the Indian banking system remains fundamentally stable and well-capitalized.

The moderation where Indian banking credit growth to moderate to 12-13% in FY27E is being viewed more as a normalization phase rather than a crisis.

Experts believe India’s strong economic growth, infrastructure investments, and rising consumption levels will continue supporting long-term credit demand.

However, banks are expected to become more cautious and disciplined in balancing growth with liquidity management.

The sector is also likely to focus more on operational efficiency, risk management, and digital transformation to maintain profitability.

Long-Term Outlook for Indian Banking

The report concluded that India’s banking sector is entering a new phase where deposit strategy, customer retention, and funding stability will become as important as loan growth.

As Indian banking credit growth to moderate to 12-13% in FY27E, banks will need to adapt to changing consumer behaviour and evolving financial markets.

Experts believe the era of easy deposit mobilization has ended, forcing banks to innovate aggressively and compete actively for customer savings.

The next few years are expected to redefine how Indian banks operate, compete, and manage growth in an increasingly digital and investment-driven economy.