India’s banking sector is poised for an uptick in credit growth, expected to rise to 13% in the financial year 2025-26 (FY26) from the current 11.2%, according to a report by Anand Rathi.
Key Drivers of Credit Growth
The report highlights several factors contributing to this expected surge, including liquidity infusion, regulatory easing, and increased government spending. Over the past three months, strong liquidity support has been witnessed in the banking sector, aided by measures such as a Cash Reserve Ratio (CRR) cut and a reduction in Risk-Weighted Assets (RWA) for lending to Non-Banking Financial Companies (NBFCs). These actions indicate a more accommodative regulatory stance by the Reserve Bank of India (RBI).
Additionally, the government’s tax reduction policy, which is expected to boost consumption by Rs 900 billion, is likely to have a positive impact. The report noted, “This, coupled with the government’s capex, can potentially drive 100bps higher credit growth to 13 per cent in FY26e vs. 11.2 per cent now.”
Liquidity Conditions to Improve in H2 FY26
According to the report, credit growth is expected to pick up in the second half of FY26 as liquidity conditions improve. While unsecured lending, such as personal loans and credit card loans, has shown signs of bottoming out, it is likely to gain momentum, especially for large banks.
Meanwhile, secured lending, including loans to Micro, Small, and Medium Enterprises (MSMEs) and housing loans, remains stable and is expected to receive further support from RBI’s initiatives.
Interest Rates and Deposit Trends
The report also highlights trends in term deposit rates (for 1-3 years) and the weighted average term deposit rate (WATDR). With the increase in deposit rates slowing down, interest rates may be nearing their peak. Additionally, despite tight liquidity conditions in certain months, certificate of deposit (CD) rates have shown signs of stabilizing, which could lead to a marginal increase in deposit growth as liquidity conditions improve.
Credit-Deposit Ratio and Bank Strategies
The report sheds light on the Credit-Deposit (CD) ratio trends. While private banks are reducing their CD ratios, public sector banks (PSBs) are increasing them, which is restricting overall credit growth. Private banks, which have a higher proportion of External Benchmark Lending Rate (EBLR)-linked loans (approximately 70%) compared to PSBs (around 50%), could face pressure on their Net Interest Margin (NIM) as interest rates decline.
However, the report states that gradual rate cuts will allow banks to adjust their deposit and lending rates, preventing any sharp decline in NIM. Furthermore, the outstanding amounts for personal loans and credit cards are expected to rise from the third quarter of FY25, which will provide additional support to NIM.
Optimistic Outlook for the Banking Sector
With improving liquidity, regulatory support, and government-led initiatives, India’s banking sector is set to experience higher credit growth in the coming years. The expected rise in credit expansion signals a positive outlook for the financial sector, reinforcing the country’s strong economic position.
(With Inputs From ANI)
