India Ratings lifts FY27 credit growth outlook to 15%, warns of margin squeeze

India Ratings and Research has raised its credit growth projection for FY27 to 15 per cent, citing sustained economic momentum and credit demand across the banking system. The rating agency expects deposit growth to expand at a slower pace of 13.6 per cent during the same period, supported by inflows through Foreign Currency Non-Resident (FCNR) deposits.

The divergence between credit and deposit growth trajectories is expected to create headwinds for lenders. As credit expansion outpaces deposit accumulation, banks will face pressure to raise funds through costlier sources, squeezing net interest margins—a key profitability metric.

Beyond funding challenges, the rating agency flagged mounting credit costs as another threat to bank earnings. Higher provisions for potential loan losses, combined with elevated funding expenses, are expected to compress the spreads that banks earn on their lending business.

The outlook reflects India's resilient economic growth and continued credit appetite among borrowers and lenders. However, sector participants will need to navigate a tightening operating environment to sustain profitability amid the structural shifts in deposit composition and credit dynamics.