After a strong 15.6% CAGR in FY22–24, system loan growth eased to 9.8% YoY in July 2025, weighed down by tighter liquidity, regulatory restrictions on unsecured lending, and subdued corporate borrowing.
Retail lending—the key growth driver for private banks—has slowed notably across secured and unsecured segments, with mortgage growth slipping to 9% and credit card loans to 8.5% YoY, from double-digit growth a year ago.
Wholesale credit demand remains weak, further dampening momentum. However, the sector is expected to see a cyclical rebound in 2HFY26, supported by festive demand, better liquidity, and lower interest rates.
While stress in unsecured retail loans remains high, delinquency levels have stabilised. Risk-based pricing and easing credit costs should aid recovery in unsecured and microfinance lending, both of which decelerated sharply in FY25.
On the funding side, margins remain under pressure as deposit costs adjust, though a gradual improvement is likely to lift profitability from 2HFY26.PSBs, long held back by asset quality issues and slow modernisation, posted 12% loan growth in FY25—outpacing private banks for the first time in 15 years.Stronger capital positions, improved profitability, and healthier balance sheets drove this turnaround, lifting their market share by ~40bps—the first such gain in over a decade. Nonetheless, slower branch expansion, lagging technology upgrades, and staffing constraints may cap the pace of growth.
System credit growth is projected at 11–12.5% over FY26–27, with PSBs likely to post steady but moderate 10–13% CAGR through FY28. Private banks are expected to grow slightly faster but will contend with elevated credit-deposit ratios.
Sector earnings should strengthen meaningfully by FY27, signalling the end of the current slowdown.
Overall, FY26 begins with a more balanced competitive landscape—PSBs regaining ground and private banks fine-tuning strategies amid margin pressures.
Over the medium term, credit demand recovery, asset quality normalisation, and gradual margin improvement will anchor growth.
HDFC Bank: Buy| Target Rs 2300| LTP Rs 1995| Upside 15%
HDFC Bank is well-positioned to deliver a strong earnings rebound, supported by improving loan growth across Commercial & Rural Banking (CRB), SME, and retail segments.
With normalization of the CD ratio and a granular liability profile, the bank is poised to accelerate credit growth—guided to be in line with the system in FY26 and ahead in FY27.
Robust asset quality (GNPA/NNPA at 1.4%/0.5% in 1QFY26) and provisioning buffers (INR366b) provide comfort, while margin recovery is expected as high-cost borrowings are replaced by deposits. We estimate HDFCB to deliver FY27E RoA/RoE of 1.9%/14.9%.
ICICI Bank: Buy| Target Rs 1670| LTP Rs 1440| Upside 16%
ICICI Bank posted 15.5% YoY PAT growth in 1QFY26, aided by stable NIMs at 4.34%, strong treasury gains (₹12.4b), & controlled opex. This reflects its consistent earnings delivery despite sector-wide NIM pressure and rising credit costs.
Advances grew 11.5% YoY and 1.7% QoQ, driven by strong momentum in Business Banking (+29.7% YoY, +3.7% QoQ), which now forms 20% of the book.
Deposits grew 12.8% YoY, while CASA mix stood at 41.2%. Average CASA ratio improved 30bp QoQ to 38.7%. ICICI’s stable GNPA/NNPA at 1.67%/0.41%, ₹131b contingency buffer, & 16.3% CET-1 ratio highlight its robust balance sheet.
Continued tech investments and confident Personal Loan/Credit Card outlook position the bank for FY27E RoA/RoE of 2.3%/17.3%.
(The author is Head – Research, Wealth Management, Motilal Oswal Financial Services Ltd.)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
