Strong growth in bank lending is projected to be the primary driver of Indian banks’ profitability despite flat or slightly lower net interest margins in the first quarter of FY27, as per a report by Systematix Institutional Equities. Banking system advances saw a 17.7% year-on-year expansion as of May 2026, a significant increase from the 9% growth recorded in May 2025, marking the highest annual growth rate since June 2024.
The report anticipates a year-on-year earnings growth acceleration in Q1FY27, exceeding 13.7% (excluding IIB and BOB) compared to over 11.9% in Q4FY26, driven by robust year-on-year advances growth and reduced provisioning costs. Services emerged as the fastest-growing segment among advances at 20.4% growth, with non-bank finance companies leading at 33.7%.
In terms of segments, the industrial segment surged to 17.5%, driven by micro & small industries at 26.2%, while retail advances grew by 15.4%, including a 17.3% increase in vehicle loans and a 10.9% rise in housing loans. Credit card outstanding growth remained subdued at just 1.3% year-on-year, the slowest growth rate in the last five quarters, according to the report.
Deposit growth continued to lag behind advances, with system-level deposits up by 12% year-on-year as of June 15, 2026, maintaining the credit-deposit ratio near 83.4%. System-level liquidity remained largely comfortable during the quarter, with surplus liquidity prevailing across the banking system except for a brief deficit between June 22 and 29, 2026, which was later reversed.
The report forecasts that net interest margins will remain relatively stable or experience marginal sequential compression in Q1FY27. The 1-year MCLR continued its downward trend during the quarter, while the share of EBLR-linked floating-rate loans increased to 90.5% for PVBs and 53% for PSBs, with the corresponding share of MCLR-linked loans decreasing to 8.8% and 43.8%, respectively. Most banks maintained steady rates on savings accounts and term deposits in the quarter.
