Motilal Oswal Boosts Bank Credit Growth Forecast; Backs ICICI, HDFC, SBI

Motilal Oswal Financial Services (MOFSL), a prominent domestic brokerage, has expressed strong confidence in the continued momentum of India's banking sector, significantly upgrading its credit growth forecast for Fiscal Year 2027. The firm now projects a 14.6% loan growth for its banking coverage universe, an increase from its earlier estimate of 13.6% and notably higher than the Bloomberg consensus estimate of around 14.2%. This optimistic outlook is underpinned by supportive measures from the Reserve Bank of India (RBI), improving liquidity conditions, and healthy demand spanning corporate and Micro, Small, and Medium Enterprises (MSME) lending. MOFSL reiterates its top stock picks within the banking space, identifying ICICI Bank, HDFC Bank, and State Bank of India (SBI) as leading choices, alongside AU Small Finance Bank and occasionally RBL Bank. The brokerage attributes its preference for these lenders to their strong execution capabilities, diversified loan portfolios, stable deposit franchises, and disciplined lending practices. The rationale for the sustained credit growth is multi-faceted. Demand for loans, particularly from businesses, remains robust, with MSMEs actively seeking additional working capital due to rising input costs. This has stretched working capital cycles across industries, prompting increased borrowing. Furthermore, areas like Loan Against Property (LAP) and commercial vehicle finance continue to exhibit healthy growth. While private sector banks are expected to capitalize on growth in high-value MSME lending and commercial vehicle finance, Public Sector Banks (PSBs) like SBI are anticipated to further gain market share in segments such as home loans, MSME lending, and passenger vehicle financing. Unsecured business loans have also witnessed a pickup, though housing loan growth has shown some moderation due to factors like limited inventory and increased construction costs. Recent RBI data corroborates this positive trend, indicating a significant surge in bank credit. Bank credit to industry grew robustly by 17.5% in May 2026, driven by expansion in large industries and the MSE sector. Overall, India's bank credit growth accelerated to an impressive 18.6% year-on-year by June 27, 2026, marking a two-year high. This broad-based growth has been observed across all segments, including industry, services, retail, and agriculture. Deposit mobilization has also been significant, with Indian banks collecting approximately ₹7 trillion in deposits during the last fortnight of June, the third-highest fortnightly growth in 29 years, indicating robust economic activity. Despite an inflationary environment, the asset quality of banks has largely held up. Motilal Oswal expects credit costs for large private banks to remain contained and projects benign credit costs for PSU banks, suggesting a stable credit environment. The brokerage's channel checks also indicate no immediate major impact from the West Asia crisis on asset quality, although rising input costs and margin contraction could affect underlying borrowers' profit margins in the coming quarters. In terms of earnings, Motilal Oswal anticipates the banking sector to achieve a compound annual growth rate (CAGR) of approximately 15% between FY26 and FY28, driven primarily by a similar pace of growth in net interest income (NII). Private banks are expected to lead this growth, with a projected earnings CAGR of around 20%, significantly outpacing PSU banks, which are forecast to grow at about 10%. Specifically, ICICI Bank is expected to lead among large private banks with strong quarter-on-quarter loan growth, attributed to its superior technology and overdraft facilities. HDFC Bank is also cited for its performance in specific vehicle finance and LAP segments, while SBI is lauded as the preferred PSU pick for its comprehensive execution and strong presence in housing loans. The overall market sentiment aligns with Motilal Oswal's positive outlook. Other reports also highlight the Indian banking system's entry into 2026 with unusual strength, benefiting from regulatory reforms, balance-sheet clean-up, and capital rebuilding. This reinforces the view that the sector is structurally better prepared for sustained growth, making it an attractive proposition for investors. The headline accurately reflects Motilal Oswal's verified stance on credit growth and their favored banking stocks, proving to be neither sensationalized nor inaccurate.

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