India’s banking sector could see domestic credit growth lose some momentum over the coming months, even as overall lending activity remains strong, according
to a recent report by Jefferies. The brokerage expects domestic credit growth to ease to around 15 per cent by March 2027 from approximately 18 per cent at present. The expected moderation is largely linked to the changing base for comparison. Jefferies believes the impact of a higher base will become more pronounced from December 2026, putting pressure on year-on-year domestic credit growth. “We expect sector domestic credit growth to moderate from 18 per cent now to 15 per cent by Mar-27 as base resets in Dec-26,” Jefferies said. Despite the anticipated slowdown, the brokerage expects banks to maintain healthy lending momentum, with overseas operations potentially providing an additional boost to overall credit expansion. Bank lending has remained resilient, with credit demand continuing to support growth across the financial system. Banks have also benefited from gaining a larger share of financing that was previously raised through bonds and external commercial borrowings (ECBs). Jefferies said system credit growth is currently running at about 18 per cent year-on-year. However, the brokerage expects the pace of domestic lending to gradually soften once the comparison base resets towards the end of 2026. The moderation, therefore, does not necessarily point to a sharp deterioration in lending conditions. Instead, it reflects the statistical impact of comparing future growth with a stronger base. The brokerage described system credit growth as one that “stays robust”, helped by healthy borrowing demand and banks capturing a greater portion of funding activity from alternative sources such as bonds and ECBs. Overseas Branches Could Give Banks An Extra Boost While domestic lending growth is expected to cool, banks could receive support from their international businesses. Jefferies estimates that greater leverage from overseas branches could lift banks’ overall credit growth by several percentage points. “Banks' credit growth can improve by 3-4ppt as it captures the leverage provided by their foreign branches,” the brokerage said. This suggests that the headline growth picture for banks could remain stronger than the domestic credit numbers alone indicate. Expansion through foreign branches could partly compensate for the moderation expected in the Indian market. Deposit Growth Also Expected To Remain Firm The report also sees room for further improvement in bank deposit growth. Jefferies expects the pace to potentially reach 17 per cent as the full effect of foreign-currency inflows is reflected in the banking system. However, the brokerage expects deposit growth to subsequently settle at a slightly lower level. It projected a “slight normalisation to 15-16 per cent by Mar-27”. System deposit growth had already accelerated to 15 per cent year-on-year as of August 14, compared with 13 per cent in June. Strong inflows through the foreign-currency deposit scheme have contributed to the improvement. Corporate Borrowing Remains Key Growth Driver Recent lending trends show that corporate borrowers continue to account for a significant portion of credit expansion. Corporate credit increased 22 per cent year-on-year in July, outpacing growth in both retail and agricultural lending. Retail credit expanded 16 per cent, while agricultural credit grew 17 per cent during the same period. Overall bank credit growth stood at 19 per cent in July. Within the corporate segment, lending to NBFCs and the engineering sector recorded particularly strong growth, rising 36 per cent each. Credit to petroleum as well as gems and jewellery also posted robust increases, at 34 per cent and 36 per cent, respectively. The figures underline the continued strength of corporate borrowing even as the broader domestic credit growth rate is expected to moderate. What Jefferies’ Outlook Means For Banks Jefferies’ assessment points to a banking sector that could continue to record healthy credit expansion in the near term, despite an expected slowdown in domestic growth later in the financial year. The December 2026 base reset is likely to make year-on-year growth rates appear less robust, bringing domestic credit growth towards the projected 15 per cent mark by March 2027. At the same time, banks may have another avenue for maintaining overall growth through their international operations. Stronger activity across overseas branches could provide a 3-4 percentage point boost, according to Jefferies. The combination of resilient credit demand, gains from competing with bonds and ECBs, firm deposit mobilisation and overseas expansion could therefore keep the banking sector's growth trajectory relatively healthy, even as domestic credit growth gradually moderates. (With Agency Inputs)
