FCNR inflows set to boost bank earnings and credit growth in FY27

NEW DELHI: India’s banks could be heading into a stronger FY27, with foreign currency non-resident deposits, healthy credit demand and stable asset quality expected to support net interest income and earnings growth, according to ICICI Securities.

The brokerage has retained its positive view on the banking sector after a strong first quarter and expects systemic credit growth of around 15 per cent year-on-year in FY27. It expects FCNR deposits to provide an additional boost to loan growth, net interest income (NII) and overall earnings.

Banking sector NII growth reached a multi-quarter high of 11 per cent year-on-year in Q1FY27. Core pre-provision operating profit and profit after tax also grew by around 15 to 17 per cent, supported by controlled operating costs and stable provisioning.

Loan growth accelerated to around 18 per cent year-on-year during the quarter, driven by a 32 per cent increase in lending to non-banking financial companies and 17 per cent growth in large industry loans.

Some of the increase in large-industry lending reflected a shift from bond-market financing towards bank credit.

Retail gold loans were particularly strong, growing around 95 per cent year-on-year, while retail credit excluding gold loans remained steady at about 12 per cent.

Private banks also gained momentum, recording loan growth of around 4 per cent quarter-on-quarter compared with 2 per cent for public sector banks.

ICICI Securities expects the current mix of systemic credit growth to remain favourable for public sector banks, while broadly similar loan growth is expected across public and private banks through FY27.

Deposit growth has also picked up sharply, reaching 15.4 per cent year-on-year by the end of July, compared with around 12 per cent in Q1FY27.

Foreign currency non-resident, or FCNR(B), deposits have been a key contributor. Inflows reached $52 billion as of August 13, equivalent to around 2 per cent of outstanding deposits.

The Reserve Bank of India has also brought forward the closing date for the FCNR(B) mobilisation window to the end of August from the end of September.

ICICI Securities expects the additional deposits to help banks manage domestic funding costs and support NII growth. As a result, the brokerage believes NII growth could be a more meaningful indicator of bank performance than short-term movements in net interest margins.

NIM trends, however, remain uneven. Large private banks recorded double-digit sequential declines, while mid- and small-sized private banks benefited from stronger gold and small and medium enterprise lending.

The improvement in earnings comes alongside relatively stable asset quality despite broader macroeconomic risks.

Gross loan slippages stood at around 1.2 per cent, down from 1.4 per cent a year earlier. Public sector banks reported particularly low slippages of around 0.7 per cent, less than half the 1.7 per cent recorded by private banks.

With credit demand strengthening, deposits rising and asset quality holding up, ICICI Securities expects the banking sector’s earnings recovery to gain further traction in FY27. FCNR inflows could provide another useful tailwind, particularly by easing funding pressures and supporting NII growth.