Indian banking sector delivered strong FY26 performance with credit growth accelerating to 16.1% year-on-year and deposits surging to 13.5% growth. The final fortnight saw remarkable momentum, with banks adding nearly six trillion rupees in incremental credit and twelve trillion in deposits. System liquidity showed meaningful relief as loan-to-deposit ratio declined to 81.4% from 83%, easing funding pressures significantly. However, the credit-deposit gap remains elevated at 2.6%, prompting banks to increase wholesale funding through certificates of deposit, which reached 14.3 trillion rupees in FY26. Analysts project sustained growth with credit expansion expected at 14% compound annual rate through FY27-28. AU Small Finance Bank and ICICI Bank emerge as top sector picks, with AU SFB pursuing universal banking license to expand liability franchise and reduce funding costs.
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