Leading state-run banks are sticking to their 11-15% credit growth targets for FY27 despite rising deposit costs. While festive season demand in retail and MSME sectors remains strong, lenders face pressure on profit margins. Investors are closely watching how these banks transition toward sustainable domestic deposit strategies after utilizing foreign currency liquidity buffers.
Public sector lenders, including Punjab National Bank, Bank of Baroda, and Canara Bank, have reaffirmed their commitment to credit growth targets of 11-15% for the current financial year. Even as the cost of raising funds rises and competition for domestic deposits intensifies, these banks expect resilient demand from agriculture, small businesses (MSMEs), and retail consumers to keep loan books expanding.
Strategic Use of Liquidity Buffers
To manage funding requirements, many state-run banks have relied on foreign currency non-resident (FCNR) deposits. By mobilizing these funds, institutions were able to secure a stable and cost-effective liquidity buffer. This strategy provided temporary relief from the need to aggressively compete for high-cost domestic term deposits, which are currently threatening industry-wide profit margins. As these banks operate in a tight interest rate environment, maintaining this cost advantage has been essential for protecting lending capacity.
Margin Pressures and Loan Repricing
While loan growth remains strong, the banking sector faces distinct challenges regarding net interest margins, or the difference between what banks earn on loans and what they pay on deposits. Competition for domestic deposits is stiff, as savings increasingly flow into alternative investment avenues. Lenders are attempting to pass these higher costs to borrowers through loan repricing, which is often linked to external benchmark rates. However, there is typically a time lag in this process, meaning bank profitability may remain under pressure until loan yields catch up with the rising cost of funds.
Asset Quality and Future Outlook
Leadership at these banks remains focused on disciplined underwriting as they scale their loan portfolios. Data from credit rating agency ICRA suggests that while overall asset quality remains comfortable, fresh non-performing assets (NPAs) for public sector banks could rise slightly to 0.8% in FY27, compared to 0.7% in the previous year. This projection highlights the risk that higher interest rates may eventually strain the repayment capacity of some retail and MSME borrowers.
Public sector banks currently hold approximately 41% of India’s total system deposits, giving them significant influence over sector trends. The ability of these banks to navigate the current interest rate cycle without sacrificing loan quality or profitability will be a key performance driver. Going forward, investors should monitor how these institutions transition from using foreign liquidity buffers toward building a sustainable, long-term base of domestic deposits to support their growth targets.