Motilal Oswal has identified ICICI Bank, State Bank of India, Kotak Mahindra Bank and AU Small Finance Bank as its top picks in the banking sector. According to the brokerage's report, systemic credit growth is around 19% year-on-year, close to its highest level in nearly a decade. The brokerage expects this momentum to continue, with overall growth expected to remain strong for a large part of CY26 before gradually moderating to mid-teens toward the end of FY27, owing to a higher base effect. Motilal Oswal currently expects 14.3% growth for its banking coverage universe in FY27, with potential upside of 100-150 basis points if economic conditions remain supportive.
The latest banking data shows that demand for loans remains firm, with credit growth led by wholesale lending while retail credit continues to grow at a healthy pace. As reported by Motilal Oswal, industry credit growth reached 22% in July 2026, while services and retail credit grew 21% and 17%, respectively. The rise in corporate lending has been supported by higher working capital requirements among large companies, mid-sized businesses and micro, small and medium enterprises. Bank lending to non-banking financial companies has also grown by more than 30% in recent months.
Bank deposits have picked up sharply, with deposit growth rising to 17.8% year-on-year as of August 31, 2026, compared with the 12-13% range seen in Q1FY27. According to the Motilal Oswal report, the key driver has been Foreign Currency Non-Resident (Bank) deposits, with inflows at $127 billion, significantly higher than expectations. This means more deposits give banks additional funds to support lending, with some banks raising overseas borrowings at attractive rates to help manage funding costs and improve liquidity.
The sharp rise in Foreign Currency Non-Resident (Bank) deposits could weigh on net interest margins in the near term. As noted by Motilal Oswal, while they estimate a negative bias on NIMs in the near term, mainly for private banks, they remain constructive on the medium-term outlook, supported by potential easing in borrowing costs and deployment of FCNR(B) deposits. Private banks could see greater pressure due to their higher use of overseas leverage, while public sector banks may see a more limited impact as some of the new deposits could replace expensive borrowings.
Motilal Oswal expects banking sector earnings to grow at around 15% annually between FY26-28. Private banks are expected to post around 20% earnings growth over this period, compared with around 11% for public sector banks. The brokerage notes that private banks are expected to grow faster than public sector banks, with estimated growth of 15.3% and 13.4%, respectively. Private banks could see greater pressure on margins due to their higher use of overseas leverage, while public sector banks may see a more limited impact as new deposits could replace expensive borrowings.
