State-run bank chiefs see credit growth holding firm despite margin pressures

New Delhi, Nov. 2 -- Six state-run banks have signalled confidence in credit growth in the second half of FY27 even as they face pressure on net interest margins (NIM) from deposit costs and competitive funding conditions.

Strong demand from retail, agriculture, micro, small and medium enterprises (MSMEs) and companies, along with festive-season borrowing, is expected to support loan growth, while foreign currency non-resident (bank), or FCNR (B), deposits have provided lenders with an additional source of funding, the chiefs of Punjab National Bank, Bank of Baroda, Canara Bank, Indian Bank, Indian Overseas Bank and Uco Bank said in interviews to Mint.

The Indian banking sector is navigating a trade-off between protecting profitability and sustaining loan growth, with festive demand expected to provide an additional boost. Together, the six lenders hold deposits of Rs.64.5 trillion, which accounts for about 41% of the total public sector bank deposit base of Rs.156.3 trillion.

While floating-rate loans are repriced relatively quickly, deposit costs tend to adjust with a lag. Competition for term deposits and the need to sustain funding momentum could weigh on margins in the coming quarters. However, bank managements are not signaling any broad-based slowdown in credit demand, with growth estimates ranging from 11% to 15%.

However, rising funding costs and competition for deposits remain key challenges. Uco Bank managing director and chief executive officer in-charge Rajendra Kumar Saboo identified current account and savings account mobilization as a concern, citing changing savings and investment patterns among customers.

Canara Bank flagged the potential mark-to-market impact of rising government security yields, which have increased from 6.75% in June to 7.38%.

Despite these pressures, the bank chiefs remain confident about sustaining loan growth, supported by improving asset quality, resilient domestic demand and alternative funding sources. Maintaining a balance between deposit costs and lending yields will remain central to profitability in the second half of FY27.

Punjab National Bank MD and CEO Ashok Chandra expects the lender's credit growth to remain at 14-15% in the coming quarters, supported by retail, agriculture and MSME lending. Its domestic NIM increased 10 basis points sequentially to 2.74% in the September quarter. Chandra expects the recent 25-basis-point repo rate increase alone to contribute an additional seven basis points to margins.

PNB's MSME portfolio growth is expected to accelerate to 21-22%, while agriculture lending is projected to grow 18-19%. PNB mobilized $2.7 billion through FCNR (B) deposits and has deployed the amount to replace bulk deposits and certificates of deposit, helping reduce funding costs.

Canara Bank is looking to sustain its credit growth momentum, supported by retail demand and improving asset quality. Its advances grew 18% year-on-year, while total business expanded by more than 14%, MD and CEO Brajesh Kumar Singh said. The bank has retained its FY27 advance growth guidance of 11-12%.

Canara Bank's retail portfolio grew 31.6% year-on-year, with housing and vehicle loans expected to remain key drivers during the festive season. Singh said the bank did not expect margins to shrink, citing its underwriting standards and low fresh slippages.

Canara Bank mobilized $5.8 billion through FCNR (B) deposits, equivalent to about Rs.55,000 crore. Singh described these deposits, with tenures of three to five years, as a stable funding source, adding that their cost was around 100 basis points below prevailing market benchmarks. They are exempt from cash reserve ratio and statutory liquidity ratio requirements.

Indian Bank raised its FY27 advance growth guidance to 13-14% from 11-13% earlier, while increasing its deposit growth outlook to 11-12% from 9-11%. Advances grew 16.4% year-on-year to Rs.7.22 trillion as of 30 September, while deposits increased 12.5% to Rs.8.74 trillion.

Indian Bank MD and CEO Binod Kumar said retail advances grew 17.37%, agriculture advances increased 17.18% and MSME lending expanded 19.06% year-on-year. Indian Bank collected $2.3 billion through FCNR deposits and another $400 million through overseas foreign currency borrowings until 30 September. It raised $500 million through external commercial borrowings and expects to raise another $500 million by December.

Uco Bank raised $730 million, comprising $630 million of FCNR (B) deposits and $100 million through other foreign currency deposits. Bank chief Saboo said the additional liquidity supported lending requirements and helped the bank avoid raising fresh bulk deposits at higher interest rates. Advances grew 24.7% year-on-year in the September quarter, significantly higher than its full-year guidance of 12-14%.

Uco Bank reported a global NIM of 3% in the September quarter, above its FY27 guidance of 2.8-2.9%. Saboo expects margins to remain above the guidance, supported by the repricing of loans linked to the external benchmark lending rate following the repo rate increase.

IOB mobilized Rs.11,000 crore, equivalent to $1.12 billion, through FCNR (B) deposits. MD and CEO Ajay Kumar Srivastava said the rupee equivalent had been deployed in lending.

The bank's global advances grew 24.35% year-on-year to Rs.3.46 trillion as of 30 September, while deposits increased 20.16% to Rs.4.07 trillion. Its domestic NIM stood at 3.49% in the September quarter, compared with 3.48% in June. Srivastava expects margins across the banking sector to improve by 3-5 basis points.

Bank of Baroda raised its FY27 advance growth guidance to 13-15% from 12-14% earlier, while increasing its deposit growth outlook to 11-13%. MD and CEO Debadatta Chand said global advances grew more than 18% in the September quarter, while deposits increased over 16%.

The lender mobilized $8.08 billion through FCNR (B) deposits, along with $1.1 billion through other routes, taking total foreign currency mobilization to $9.18 billion. Chand expects its NIM to improve in the December quarter as the repricing of loans linked to external benchmarks supports interest income.