“RBI’s Push Sets Stage for Credit Revival” – PL Capital Turns Bullish on Banks’ FY26 Outlook

Mumbai | June 24 – In a move that could mark the beginning of a new credit upcycle, the Reserve Bank of India’s (RBI) recent policy measures are expected to meaningfully revive bank lending and support margin stability, according to PL Capital’s latest banking sector update.

Following a series of liquidity-boosting interventions by the RBI — including a 100 bps repo rate cut and phased CRR reductions — PL Capital has raised its FY26/27 loan growth forecast by 100 basis points to 12% YoY, led by stronger activity in NBFC and unsecured credit. With funding pressure easing and rates softening, banks now appear better positioned to deploy balance sheet liquidity more efficiently.

“Contrary to expectations of a NIM cut post repo reductions, we are actually raising our aggregate NIM estimates by 2/4 bps for FY26/27 to 3.11% and 3.19%, respectively. The decline in WATD (Weighted Average Term Deposit) rates has been quicker than loan yields, creating room for spreads to hold,” noted the report from PL Capital.

Liquidity Boost, Loan Revival: A New Lending Cycle Begins

System credit growth had slowed from 13.7% in July 2024 to 10.2% in April 2025, weighed down by weak offtake in housing, agriculture, NBFCs, and unsecured loans. But RBI’s shift to an accommodative stance since December 2024 has set the stage for a turnaround.

The policy support includes:

• Repo rate cuts of 100 bps (including a surprise 50 bps in June),
• CRR cut of 150 bps (to be implemented in phases),
• Withdrawal of risk weight hikes on NBFC and MFI exposure,
• Relaxation of liquidity coverage ratio (LCR) norms.

PL Capital believes these steps will begin reflecting in actual credit growth from H2FY26, especially in segments that had slowed sharply.

NBFCs and Unsecured Credit to Drive Growth

PL expects NBFC loan growth to improve by 60–70 bps, and unsecured credit by 35–40 bps over FY26–27. With system liquidity now positive and risk weights relaxed, deployment towards NBFCs is likely to improve. Unsecured stress is also seen stabilising, and the recent tax exemption limit hike (to ₹12 lakh) could further support demand.

“Stress in PL/CC segments has likely peaked, and tax changes could reduce delinquency risk. Together with better capital buffers, this creates a favourable risk-reward,” the note added.

Funding Shift: Banks to Tap Surplus Liquidity

A key shift is underway in how banks fund credit. Instead of aggressive deposit mobilisation, many banks are likely to deploy balance sheet liquidity to support incremental loan growth. As a result:

• Aggregate LDR is set to rise by 121/173 bps to 82.6% for FY26/27,
• System liquidity ratio is expected to fall from 31% to ~29%,
• Cost of funds may drop by ~70 bps even as loan yields fall ~81 bps.

“We expect the deposit rate cuts since March (~66–123 bps) to continue. As transmission plays out, NIMs should hold up better than earlier feared,” PL Capital stated.

Valuation Implications: Sector Rerating on the Cards

PL’s sensitivity analysis shows that if system loan growth hits 14.7% in FY27 (vs 12.6% base), core earnings could be upgraded by 3.6%, and bank stock multiples could expand by 5–11%. PSU banks would benefit most due to higher NBFC exposure and lower base valuations.

Preferred Picks: Axis Bank and SBI

“We prefer Axis Bank (AXSB) among private names, as it has the highest earnings upgrade potential in a surplus liquidity setup with falling unsecured stress,” PL said.

“Among PSUs, SBI stands out. Its NBFC-heavy book, along with meaningful unsecured exposure, offers both growth and margin defence.”

Revised PL Capital Bank Stock Targets (June 2025)

CMP as on june 22.

Margins Stable, RoA & RoE to Improve in FY27

While headline NIMs are seen rising only modestly, PL Capital expects core RoA to improve to 1.25% by FY27 (up 5 bps) and core RoE to reach 13.6%, driven by better operating leverage and lower funding cost.

Despite the rate cycle, most mid-sized banks are unlikely to see NIM compression due to easing competition for deposits and abundant system liquidity.

Outlook: Credit Upcycle Could Surprise on the Upside

PL Capital remains structurally positive on the banking space and sees a potential credit upcycle building into FY27, led by NBFC, unsecured and MSME segments. If monsoon trends remain favourable and private capex picks up, loan growth may beat even the revised estimates.

“In the bull-case scenario, banks like SBI, Axis Bank, ICICI Bank and Union Bank could see earnings upgrades of 5–7% and TP upgrades of up to 11%,” PL’s analysts highlighted.

Conclusion

The macro setup—defined by RBI easing, surplus liquidity, and improved credit appetite—creates a favourable backdrop for Indian banks in FY26–27. While credit acceleration may not be linear, PL Capital sees clear upside for lenders with NBFC/unsecured levers, solid deposit franchises, and margin protection buffers.

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