MUMBAI: Credit rating agency Icra Ratings has said bank credit is likely gain traction from the second half of the fiscal, buoyed by the likely consumption boost arising from the GST rate cuts, and falling deposit costs. In Q1, credit growth stood at a low 10.5%, while this was 10.9% in FY25 and 16.3% in FY24.
If its forecast turns out to be true, it sees bank credit clipping at 10.4-11.3% or in absolute terms adding Rs 19-20.5 trillion in incremental disbursements for the fiscal, up from Rs 18 trillion in FY25, on the back of easing funding costs and growth supporting policy measures, despite some asset quality stress, Anil Gupta, co-group head, financial sector ratings at the agency told reporters here Wednesday.
On the other hand, the agency expects non-banking finance companies to lend 15-17% more this fiscal, compared to 17% in FY25 and 24% in FY24, despite a slower start primarily due to the troubles in the microfinance space, AM Karthik, co-group head financial sector ratings at the agency, said.
Karthik said during the first five months of FY26, incremental bank credit to non-banks stood at a much lower Rs 3.9 trillion, down from Rs 5.1 trillion in the same period last year.
The recent GST rate cuts and the reduction in the cash reserve ratio would help revive domestic demand, boosting credit growth across both sectors, Gupta said.
On the asset quality front, they said there is rising stress level in retail and small business loan segments, impacting both banks and non-banks. However, with economic activity expected to pick up following policy changes, lending appetite is likely to improve, Gupta said.
While credit costs are anticipated to rise modestly, easing funding costs are expected to support lenders earnings, he said, adding the agency sees a 13 bps increase in banks’ credit costs and around 30 bps for NBFCs over FY25 levels, with the non-housing segment experiencing greater pressure. Gupta expects credit cost pressures to be more pronounced in unsecured and small-ticket loans.
As of July, loans to MSMEs and unsecured personal loans accounted for 17% of banks’ non-food credit of Rs 184 trillion, while for NBFCs, small business loans and unsecured consumption loans comprised nearly 34% of their Rs 35 trillion credit book as of March 2025.
He flagged the evolving macroeconomic challenges and global uncertainties that may impact borrowers, particularly those in export-dependent sectors such as transport linked to apparel and gems and jewelry exports.
Income shocks could impair repayment capacity, especially for loans like microfinance, personal, and home loans, Gupta added.
Despite these risks, the agency maintains a stable outlook for banks and NBFCs, excluding the microfinance segment where the outlook remains negative. Strong capital buffers are seen as sufficient to absorb potential stress, though smaller NBFCs with weaker capital and high overdue levels may face elevated risks and refinancing challenges.
Overall, while challenges persist for lenders, the combination of policy-driven demand revival, lower funding costs, and abundant liquidity creates a favourable environment for healthy credit growth in FY26, concludes the agency.