Bank Credit Growth to Hit 12% in FY26, Crisil Reports

Introduction: A Positive Outlook for Indian Banks

India's banking sector is set for accelerated credit growth in the second half of the fiscal year 2025-26, with projections indicating an overall expansion of 11-12%, according to a recent report by rating agency Crisil. This forecast marks a notable increase from the 11% growth recorded in the previous fiscal year and a significant pickup from the subdued 9.5-10% growth seen in the first quarter of FY26. The primary engine for this expansion is expected to be the retail credit segment, supported by favorable regulatory measures and a revival in consumption demand.

The Retail Sector: Leading the Charge

The retail loan segment, which constitutes approximately one-third of total bank credit, is projected to grow at a robust pace of 13%. This is an improvement from the nearly 12% growth observed in the previous year. The uptick is attributed to several factors, including anticipated GST cuts, lower inflation, and a normal monsoon, all of which are expected to boost consumer spending and rural incomes. Unsecured loans and gold loans are highlighted as key drivers within this segment, poised to regain momentum after a period of moderation following the Reserve Bank of India's revised risk weight guidelines.

Corporate and MSME Loan Dynamics

In contrast to the retail boom, corporate loan growth is expected to see a slight deceleration, slowing to around 9% from nearly 10% in the previous fiscal. This moderation is largely due to corporations exploring cheaper funding alternatives, such as the corporate bond market, which saw a more than 60% year-on-year surge in issuances in the first quarter. However, as the RBI's repo rate cuts are transmitted more effectively to bank lending rates, a partial reversal of this trend is anticipated in the second half of the year. Meanwhile, the Micro, Small, and Medium Enterprises (MSME) sector is forecasted to experience strong credit growth of around 14%, bolstered by increased digitalisation and formalisation.

Key Catalysts for Growth

Several government and regulatory measures are underpinning the positive credit growth outlook. The RBI's initiatives to enhance systemic liquidity, including a phased reduction in the cash reserve ratio (CRR) and revised liquidity coverage ratio (LCR) norms, are crucial for ensuring adequate deposit growth to support lending. Additionally, the rollback of higher risk weights on bank exposures to Non-Banking Financial Companies (NBFCs) is expected to stimulate lending to this important sector, with growth projected at 15-17%.

Sector-Wise Credit Growth Projections for FY26

A detailed look at the forecasts reveals a multi-faceted growth story across different segments of the Indian economy.

Asset Quality and Profitability Remain Strong

From an asset quality perspective, the outlook remains stable. Crisil expects the gross non-performing assets (NPA) ratio to inch up slightly to a range of 2.3-2.5% by the end of FY26. While this represents a minor increase, it remains significantly low when compared to historical highs, indicating a healthy credit environment. The banking system's capital adequacy ratios are at multi-decade highs, providing a strong buffer against potential shocks. Furthermore, the return on assets (RoA) is expected to stay healthy at 1.25-1.3% for the fiscal year, underscoring the sector's profitability despite a potential 5-15 basis point compression in net interest margins.

Potential Risks and Monitorables

Despite the optimistic forecast, Crisil has flagged certain areas that require monitoring. A decline in the contribution of households to deposit accretion could raise concerns about deposit stability over the long term. Additionally, export-oriented MSME sectors, such as gems and jewellery, textiles, and seafood, may face stress due to higher US tariffs. The volatile external environment, a potential slowdown in private capital expenditure, and trends in household indebtedness are other key factors that could pose downside risks to the growth projections.

Conclusion

The Indian banking sector is poised for a period of accelerated growth in FY26, driven primarily by the retail and MSME segments. Supportive regulatory policies and a favorable macroeconomic environment are expected to fuel this expansion. However, banks will need to remain vigilant, carefully managing asset quality and navigating potential risks from both domestic and global factors to ensure sustainable and profitable growth.