Bank credit is expected to grow by 100-200 basis points (bps) to 12-13% in the current fiscal year, compared with 11.0-11.5% estimated for FY25. This growth will be driven by three key factors -- recent regulatory measures, increased consumption from tax cuts, and lower interest rates, according to a new report by Crisil Ratings.
However, Crisil notes that deposit growth—a critical factor in sustaining credit growth—remains an area to watch.
Regulatory Support for Credit Growth
Two major regulatory changes are likely to boost bank lending:
1. Rollback of Risk Weights for NBFCs
Effective April 1, 2025, the Reserve Bank of India (RBI) has reversed a 25 percentage point increase in risk weights on bank loans to certain non-banking financial companies (NBFCs) that was implemented in November 2023. This move will ease the flow of credit to NBFCs.
While bank lending to NBFCs grew at around 21% CAGR in FY23 and FY24, it slowed sharply to an estimated 6% in FY25. The rollback should help revive this segment.
2. Deferral of Liquidity Coverage Ratio Norms
The RBI has also postponed the implementation of stricter liquidity coverage ratio (LCR) rules by a year. These norms would have reduced banks’ LCRs by 10-30 percentage points. Now, banks can use those funds to support credit growth instead.
Tax Cuts, Lower Rates to Boost Retail Credit
Income tax breaks in the Union Budget and expected lower inflation are likely to spur consumption, boosting demand for retail loans. Interest rates are also trending lower—following a 50 bps repo rate cut since February 2025, and another 50 bps cut expected this fiscal.
Crisil projects corporate credit—which accounts for about 41% of total bank loans—to grow 9-10% this fiscal, up from 8% in FY25. A large part of this will come from NBFC lending, which represents around 18% of corporate credit. However, Crisil’s Director Subha Sri Narayanan notes that banks will remain cautious and more selective than in the past.
Infrastructure development will continue to support corporate lending, especially in sectors like cement, primary steel, and aluminium. But uncertainty around tariffs remains a concern for several other sectors, and most companies are expected to remain cautious about taking on new debt.
One trend to watch: higher-rated companies may shift to the bond market for funds, as bonds reprice faster in anticipation of further rate cuts, potentially impacting demand for bank loans.
Retail and MSME Credit Outlook
Retail loans, which make up ~31% of bank credit, are projected to grow 13-14% this year, up from ~12% in FY25. Home loans—around 45-50% of retail credit—are expected to benefit from improved affordability due to falling interest rates.
While banks are cautious on unsecured lending, continued demand and better loan performance—thanks to tighter underwriting—could drive some growth in the second half of FY26, especially off the low base.
Crisil expects MSME credit (about 16% of total loans) to grow steadily at 16-17%, up from ~15% in FY25. This will be supported by government initiatives, increased digitalisation, formalisation, and better use of data, which have helped banks refine their lending models.
Agricultural Credit and the Role of Deposits
Agriculture credit is expected to remain stable at 11-12%, tied closely to monsoon performance.
However, the real key to sustaining overall credit growth lies in deposits.
Vani Ojasvi, Associate Director at Crisil Ratings, points out that while the gap between credit and deposit growth has narrowed to under 100 bps, this is mainly because of slower credit growth. "Deposit growth had been constrained due to tight liquidity, but conditions have improved. March 2025 ended with a liquidity surplus, which has continued into April. With the RBI maintaining adequate liquidity, deposit growth should pick up, supporting overall credit expansion," she said.