IDFC First Bank has secured its first international investment-grade issuer credit ratings from S&P Global Ratings, marking an important milestone in the lender’s progress ahead of its plans to enter the global bonds issuance market to diversify its funding resources.

S&P has on 13 August assigned IDFC First Bank a 'BBB-' long-term rating with a ‘stable’ outlook, and a ‘A-3’ short-term rating.

The investment-grade rating, according to IDFC First Bank chief financial officer Sudhanshu Jain, will strengthen the bank’s standing with global investors and financial institutions. 

“It will go to support access to international funding markets, standby letter of credit (SBLC) lines, foreign currency funding, FCNR(B) deposit mobilisation, correspondent banking relationships, and cross-border trade finance activities,” he said. 

The timing of the rating is perfect as the Reserve Bank of India (RBI) has opened a concessional swap window on fresh foreign currency non-resident (Bank), or FCNR(B), deposits to attract dollars, bolster the country’s balance of payments and defend the rupee. This has prompted banks to offer leveraged schemes to non-resident Indians (NRIs), swell their FCNR(B) deposits and source rupee liquidity from the RBI, which will bear the hedging cost.

Rating ahead of global capital raise plans

S&P expects IDFC First Bank to raise additional capital of up to Rs 7,500 crore in FY27 and to conduct further equity infusions to support its growth plans. The bank, it said, has raised capital frequently since fiscal 2021, demonstrating ‘good’ access to equity markets.

There are several factors going in favour of IDFC First Bank. S&P outlines these as strong funding profile with a high CASA (current account savings account) deposits ratio, healthy net interest margins (NIM), higher-yielding loan products in portfolio, stable asset quality and declining credit costs.

S&P expects IDFC First Bank to maintain strong capitalisation over the next 18-24 months. Its risk-adjusted capital (RAC) ratio is projected to stay at 10%-10.5%, compared with 10.9% as of March 2026, supported by regular capital raisings, improving profitability and a low dividend payout policy.

“The bank’s loan book is likely to grow at 20% per annum over that period (18-24 months), faster than the wider Indian banking industry,” the agency said.

Why bank has high NIMs

The bank’s elevated NIM is due to a larger share of higher yielding products in its portfolio, such as unsecured retail loans, microfinance, two-wheeler loans, and loans provided for the purchase of consumer durables. 

The pressure on such strong NIMs was felt a couple of years back when the microfinance sector came under stress and margins fell from a peak of 6.36% in FY24 to 6.09% in FY25 and then to 5.75% in FY26. But the bank feels that with the microfinance industry gradually coming back to normalcy, the pressure on NIMs would diminish. For the first quarter ended June 2026, the bank’s NIM widened by 25 basis points year-on-year to 5.96%.

There could be a minor contraction as the bank plans to grow its corporate loan book where the NIM is a little lower than retail lending. But the lender’s NIMs would still remain strong and one of the healthiest in the sector.

“We have been growing some segments of business which could be NIM dilutive but still makes sense in the ROA (return on assets) play. The cost of funds could stabilise and stay very range bound around the 6% mark. There could also be some normalisation of the investment book during the course of the year. We feel that margins could broadly stay around the 5.8% handle now for the full year,” Jain told analysts in the first-quarter post-earnings call.

S&P has forecast the lender’s NIM to improve by 5-10 basis points in FY27 (from 5.75% in FY26) and then stabilise. 

“The bank has by far the highest NIMs among Indian banks we rate…Future healthy growth in relatively low yielding corporate loans should balance out the effect of growth in the high yielding microfinance book on the bank's NIM,” the agency said.

Change in loan mix

IDFC First Bank will see a change in its asset mix as it plans to shift gears and work at a different risk-reward balance. 

The bank is set to expand the share of corporate loans in its lending portfolio, which is expected to grow faster than other sectors. The microfinance portion of the bank’s portfolio could rebound after two years of decline, but will likely remain below 5% of the total loan mix.

The lender will target higher growth in lower credit cost segments, such as prime mortgages, loans against property and safer commercial vehicle segments like large fleet operators. 

The retail focus will continue to be at the epicentre of the bank’s growth strategy.

Asset quality to stay stable

Despite a sizeable exposure to higher-yield and riskier segments, the bank’s asset quality is expected to stay stable. This is due to tech-driven underwriting, high government guarantee coverage on microfinance loans and a diversified portfolio that is gradually pivoting toward lower-risk segments. 

S&P’s ‘stable’ outlook on IDFC First Bank represents expectations of manageable asset quality risks and a granular retail funding profile. The agency expects the bank's non-performing loans ratio to be range bound at 1.7%-1.8% of total loans over the next two years.

For the first quarter ended June, IDFC First Bank’s gross non-performing asset (NPA) improved by 9 basis points quarter-on-quarter to 1.51% as on June-end 2026. Net NPA improved by 4 basis points to 0.44% during this period.

“The bank's risk position is characterised by stabilising asset quality and declining credit costs (1.6% in the first quarter of 2027 compared with 2.1% in fiscal 2026) following previous microfinance and infrastructure stress,” S&P said.

Granular deposits with high CASA ratio

The bank has a strong funding profile, with CASA deposits ratio comprising 50.8% of the total base as of 30 June 2026. 

Customer deposits is just shy of Rs 3 lakh crore, with CASA crossing the milestone of Rs 1.5 lakh crore to finally settle at Rs 1.58 lakh crore at June-end. Certificate of deposits accounts for 12,486 crore, taking the total deposit base to Rs 3.12 lakh crore.

Since the 2018 merger between IDFC Bank and Capital First that created IDFC First Bank, the lender has transitioned from a wholesale-dependent funding model to a granular, retail-led deposit franchise. As of 31 March 2026, core deposits comprised approximately 89% of the bank's total funding base, with retail deposits accounting for nearly 80% of total deposits.

The CASA deposits, though, come at a higher cost compared with peers as the bank pays a higher interest rate on savings account. But this strategy has improved granularity of the bank's deposit base. The deposit concentration--measured by the share of the top 20 depositors in total deposits--declined to 9.4% as of 31 March 2026. This is comparable with similar-size peers, although higher than larger banks in India (4%-5% of total deposits.

Deposit mobilisation has also been fast, with a historical compound annual growth rate of 31% since the merger. Deposit growth has outpaced loan growth, improving the bank's customer loan-to-deposit (LDR) ratio gradually to about 95% as of 30 June 2026, versus over 100% as of 31 March 2024. This is comparable to larger private sector peers in India but significantly higher than the public sector banks.

“To secure granular retail deposits, the bank uses premium pricing, resulting in a higher cost of funds relative to rated peers. While this strategy builds a resilient and diversified base, it introduces interest rate sensitivity. The management has demonstrated an ability to moderate this cost over the last few years even as it has expanded the bank's deposit base,” S&P said. 

Scope to increase market share

S&P expects IDFC First Bank’s market share to improve over the next two years, which is currently about 1.3% of loans and 1.1% of deposits in the banking sector.

“Management has demonstrated its ability to grow the bank's assets and liabilities while building strong digital capabilities to compete with larger Indian banks. Although the bank has a leaner physical footprint than peers, a robust digital architecture that could drive customer stickiness and scalability augments its pan-India presence,” S&P said.

Lowering cost-to-income ratio key to higher profitability

The bank’s profitability is expected to improve over the next two years as cost-to-income ratio and credit costs decline. During this period, S&P estimates the bank’s credit costs to be 1.5%-1.6% of total loans. “This will likely stay higher than our forecast for the sector average of 0.8%-1.0% of loans over the next two years. Even after adjusting for the credit costs, the bank’s margins should stay stronger than the sector,” it said.

As the bank scales up, S&P estimates the cost-to-income ratio to also improve to 65%-70% during the next two years, compared with 75% in FY26. Growth in operating expenses should be lower than previous years as major investments in technology and branches taper off.

Investment in branches, employees and technology has kept the bank's operating expenses higher than those of peers, weighing on its profitability (return on average assets of 0.7% on average over fiscal 2022-2026). “As newer businesses and branches generate higher returns, income growth should continue to significantly outpace operating expense growth,” the agency added.

S&P forecasts the bank will have a ratio of core earnings to average adjusted assets of 1.0%-1.2% (1.1% annualised for the first quarter of fiscal 2027) over the next two years. “This level is comparable with those of regional peers and the sector average in India, although lower than those of larger private-sector banks,” it said.

Risks covered

S&P believes IDFC First Bank has adequate provision coverage at over 90% of NPAs against emerging spillover risks from the Middle East conflict and a weaker-than-normal southwest monsoon in India. These factors pose a risk to smaller businesses, lower income households and agriculture-linked portfolios. The bank has set aside Rs 510 crore in contingency provisions against these risks.

S&P’s rating outlook has given IDFC First Bank the lift at a time when it is preparing to raise overseas capital through bonds issuance, the RBI has opened the swap window for FCNR(B) deposits, and the lender is chasing faster growth.