Introduction to Credit Growth in FY26

The Indian banking sector is poised for a moderate credit growth in the financial year 2025-26 (FY26), influenced by several factors including regulatory easing, liquidity conditions, and government initiatives. After experiencing a robust growth in recent years, the credit expansion is expected to stabilize, reflecting both opportunities and challenges in the sector.

Overview of Credit Growth Expectations

Projections for FY26

Credit growth in India's banking sector is expected to moderate in FY26, with estimates ranging from 10.4% to 14% depending on the sources. Anand Rathi predicts a growth rate of 13%, while Icra offers a more conservative estimate between 10.4% and 11.2%[1][2]. Ambit Capital Research suggests a slightly higher range of 12-14%[4]. This moderation is a significant shift from the rapid growth observed in previous years, where loan growth touched highs of over 20% year-on-year[3][5].

Factors Influencing Credit Growth

Several key factors are expected to influence credit growth in FY26:

• Regulatory Easing: The Reserve Bank of India's (RBI) decision to defer changes in the liquidity coverage ratio (LCR) framework and reduce risk weights on non-banking financial companies (NBFCs) will support credit expansion[2].
• Liquidity Conditions: Improving liquidity due to measures like cut in Cash Reserve Ratio (CRR) and reduction in Risk-Weighted Assets (RWA) for lending to NBFCs will facilitate smoother credit flow[1].
• Government Initiatives: Government spending and tax reduction policies are predicted to boost consumption and, consequently, credit demand[1].

Trends in Loan and Deposit Growth

Loan-Deposit Ratio (LDR)

The gap between credit and deposit growth is expected to narrow significantly in FY26, down to 80 basis points from an average of 386 basis points between FY22 and Q3FY25[3][5]. This narrowing is partly due to a decrease in the incremental Loan Deposit Ratio (LDR), which fell to 85% in February 2025 from 117-118% in the same period of 2024[3][5].

Private vs. Public Sector Banks

• Private Banks: These banks have seen a significant drop in their incremental LDR, driven by higher deposit growth (13.9% Y-o-Y) compared to loan growth (9.3% Y-o-Y)[3][5].
• Public Sector Banks (PSBs): PSBs face challenges with lower deposit growth rates, typically below 10% Y-o-Y, while their LDR remains close to higher limits, necessitating a focus on deposit mobilization[3][5].

Challenges Ahead

Asset Quality Concerns

Despite strong overall asset quality, there are concerns about a rise in non-performing assets (NPAs) in the retail sector, primarily due to the growth in unsecured loans like personal loans and credit cards. Banks are consolidating their retail lending portfolios to manage potential balance sheet stress[4].

Margin Pressures

As interest rates stabilize, banks may face pressure on their net interest margins (NIMs) due to high deposit costs and falling yields. However, with a well-mixed portfolio, some banks can manage this impact more effectively[4].

Regulatory Support and Future Outlook

The RBI's accommodative stance and potential easing of risk weights on unsecured retail loans are expected to support steady loan growth in FY26. While challenges exist, the improving liquidity conditions and government initiatives set a positive stage for the banking sector's growth trajectory.

Conclusion

In conclusion, the moderation in credit growth in FY26 reflects both challenges and opportunities for the Indian banking sector. With regulatory support, improving liquidity, and government initiatives, banks are poised to navigate these challenges effectively. However, addressing asset quality issues and managing margin pressures will be critical for sustainable growth.

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