Bank credit is expected to grow by 100-200 basis points (bps) on-year to 12-13 per cent during this fiscal in comparison to 11.0-11.5 per cent estimated for fiscal 2025, stated a report by Crisil Ratings. This, it added, is being driven by three tailwinds: the recent supportive regulatory measures, a boost to consumption from tax cuts and softer interest rates. However, deposit growth, a crucial support for credit growth, bears watching, per the analysis by the brokerage firm.
According to the Crisil report, two key regulatory changes are expected to support bank credit growth. One, with effect from April 1, 2025, the Reserve Bank of India (RBI) has rolled back the 25 percentage points’ (pps) increase in the risk weights for bank loans to certain categories of non-banking financial companies (NBFCs) that was announced in November 2023. This will improve the credit flow to NBFCs. The banking system’s exposure to NBFCs had risen at a compound annual growth rate of around 21 per cent over fiscals 2023 and 2024 but fell sharply to an estimated 6 per cent in fiscal 2025.
Two, the RBI has deferred the implementation of the more-stringent liquidity coverage ratio (LCR) norms by a year. Their implementation as proposed would have reduced the LCRs of most banks by 10-30 pps. The funds to be set aside to create the LCR cushion can now be directed towards credit growth, the report maintained.
Additionally, per the Crisil analysis, the income tax breaks afforded in this fiscal’s Union Budget, and expected benign inflation have the potential to spur consumption and thus demand for retail loans. Lower lending rates, following the 50 bps of repo rate cuts since February 2025, and another 50 bps of reductions likely this fiscal should also support demand for loans.
Subha Sri Narayanan, Director, Crisil Ratings, said, “Credit growth in the corporate sector, which accounts for ~41 per cent of bank loans, is expected to be 9-10 per cent, compared with ~8 per cent estimated for fiscal 2025, as lending to NBFCs — one of the largest sub-segments of corporate credit (~18 per cent) and a key contributor to growth prior to fiscal 2025 — improves with the rollback of higher risk weights. However, such growth in lending to NBFCs may still be lower than the levels seen in the past as banks will be more selective going forward.”
What will also support corporate credit growth is the downstream demand from the ongoing infrastructure buildout, which should continue to drive investments in the cement, primary steel and aluminium sectors. But for many other sectors, the ongoing tariff – related uncertainties remain monitorable. In general, companies are expected to be cautious about leverage.
While lower interest rates will benefit, Crisil said, the potential impact of the corporate bond market substituting bank loans for higher-rated borrowers — given the faster re-pricing there as they factor in upcoming rate cuts — will bear watching too.
Retail loans, constituting around 31 per cent of bank lending, are expected to grow 100-200 bps to 13-14 per cent this fiscal from about 12 per cent in fiscal 2025. Home loans remain the largest constituent of retail credit (45-50 per cent) and the improved affordability in a lower interest rate regime should support growth here. While banks will remain cautious regarding unsecured lending, continued demand and better performance of the newer portfolio following tightened underwriting norms could lead to some pick-up in growth in the second half of fiscal 2026 off the low base.
Growth in the MSME segment (16 per cent of overall credit) is seen steady at 16-17 per cent this fiscal, compared with around 15 per cent in fiscal 2025, supported by government measures. Higher digitalisation and formalisation of the sector, and democratisation of data have enabled banks to refine their MSME lending models and cater more efficiently to the sizeable demand here.
Per Crisil, the 11 key sectors will see moderate to low impact because of the tariffs. Compared with its previous assessment, the impact is expected to be higher for one sector (diamond polishing) and lower for two (smartphones and textiles). Agricultural credit growth, it added, will continue to be linked to monsoon and is expected to be rangebound at 11-12 per cent this fiscal. All said, the ability to garner deposits will remain crucial to support credit growth.
Vani Ojasvi, Associate Director, Crisil Ratings, said, “While the gap between credit growth and deposit growth has narrowed to less than 100 bps in recent months, this is on account of slowdown on the asset side. While deposit growth has been constrained by tight systemic liquidity, the end of March 2025 saw liquidity turning to surplus and has remained so in April. With the RBI assuring adequate liquidity, the scenario should be more benign going ahead. This should support deposit growth and, in turn, credit growth.”