India’s banking sector is seeing credit growth hit near-decade highs, while deposit mobilisation is also gaining pace. But rising deposits could put pressure on margins in the near term.
What is driving the banking sector now? The brokerage house Motilal Oswal in its report noted that systemic credit growth is around 19% year-on-year, close to its highest level in nearly a decade.
The brokerage expects this momentum to continue, with four stocks among its top ideas — ICICI Bank, State Bank of India, Kotak Mahindra Bank and AU Small Finance Bank.
The latest banking data shows that demand for loans remains firm. As per the brokerage report, credit growth was led by wholesale lending, while retail credit continued to grow at a healthy pace.
“Overall, we expect growth momentum to continue for a large part of CY26, before gradually moderating to mid-teens toward the end of FY27, owing to a higher base effect,” added Motilal Oswal report.
The brokerage currently expects 14.3% growth for its banking coverage universe in FY27. However, there could be an upside of 100-150 basis points if economic conditions remain supportive.
Private banks are expected to grow faster than public sector banks, with estimated growth of 15.3% and 13.4%, respectively.
There is another important development. Bank deposits have picked up sharply. According to the Motilal Oswal report, deposit growth rose to 17.8% year-on-year as of August 31, 2026, compared with the 12-13% range seen in Q1FY27 .
The key driver has been Foreign Currency Non-Resident (Bank) deposits. Inflows stood at $127 billion, significantly higher than expectations.
This means more deposits give banks additional funds to support lending. The brokerage also noted that some banks are raising overseas borrowings at attractive rates, which can help manage funding costs and improve liquidity.
The sharp rise in Foreign Currency Non-Resident (Bank) deposits could weigh on net interest margins in the near term.
Motilal Oswal report noted, “While we estimate a negative bias on NIMs in the near term (mainly for private banks), we remain constructive on the medium-term outlook, supported by a potential easing in borrowing costs and deployment of FCNR(B) deposits.”
Private banks could see greater pressure because of their higher use of overseas leverage. Public sector banks, meanwhile, may see a more limited impact as some of the new deposits could replace expensive borrowings.
Corporate and wholesale lending has also picked up meaningfully. Industry credit growth reached 22% in July 2026, while services and retail credit grew 21% and 17%, respectively.
The brokerage said the rise in corporate lending has been supported by higher working capital requirements among large companies, mid-sized businesses and micro, small and medium enterprises.
Bank lending to non-banking financial companies has also grown by more than 30% in recent months.
Motilal Oswal has identified ICICI Bank, State Bank of India, Kotak Mahindra Bank and AU Small Finance Bank as its top ideas.
“Prefer ICICI Bank, State Bank of India, Kotak Mahindra Bank and AU Small Finance Bank,” added the report.
The brokerage expects banking sector earnings to grow at around 15% annually between FY26-28.
Private banks are expected to post around 20% earnings growth over this period, compared with around 11% for public sector banks.