Rating agency Icra Ltd expects bank credit growth to moderate to 10.4-11.3% in 2025-26, from 10.9% in 2024-25 and 16.3% in 2023-24, even as incremental credit flow rises to ₹19-20.5 trillion from ₹18 trillion in the previous fiscal year.
The rating agency said on Wednesday that non-banking financial companies (NBFCs), excluding infrastructure lenders, are projected to expand their loan books by 15-17% in the current fiscal year, compared with 17% last fiscal year and 24% in the year prior.
“While the pace of incremental bank credit growth in the current year lags at ₹3.9 trillion for the first five months of FY26 compared to ₹5.1 trillion for the previous year, the recent GST (goods and services tax) rate cuts aimed at spurring domestic demand and to partly offset the tariff impact on the exports would support credit expansion for banks and NBFCs in the near term,” said Icra.
It said the gradual downward repricing of deposit costs will improve banks’ competitive positioning against debt capital markets. An easing credit-to-deposit ratio and abundant liquidity in the system are also expected to support lending growth.
Abundant liquidity is not a constraint for banks in 2025-26, but credit growth remains slow due to pressure on margins and competition from debt markets, said Anil Gupta, senior vice-president and co-group head at Icra.
“The incremental credit flow for the current fiscal year in absolute terms is lower than what we saw last year. In the first five months of FY26, incremental credit stood at around ₹4 trillion compared to ₹5 trillion in the same period last year, a decline of almost 20%,” said Gupta.
Banks are choosing to protect margins rather than chase volumes. “Private banks told us they would prefer to maintain margins rather than chase volumes, and possibly cut down the volume,” he said.
Despite a 100 basis points (bps) decline in fresh deposit rates since January, the existing deposit base has re-priced down by only 17 basis points, while lending rates have already fallen by 49bps. “This has resulted in significant margin compression, and Q2 could be the bottom. Incrementally, we don’t expect further rate cuts, which means margins should start improving for banks after Q2,” said Gupta.
Corporate bond issuance also weighed on bank loan growth. According to Icra, record high bond issuances of ₹3.5 trillion in Q1FY26, an all-time high for any quarter, show where the growth is coming from. Slower growth from banks, it said, should be seen in relation to more competitive funding available from debt capital markets.
Still, Icra expects full-year credit flow to improve. “Historically, the last seven months of the year account for 70-130% of incremental credit flow. With GST cuts, better consumption, and stable margins, we believe growth should be at the higher end of our 10.4-11.3% estimate for the banks,” said Gupta.
