Mumbai, Domestic ratings agency Icra on Wednesday said bank credit growth is likely to moderate to under 12 per cent in this financial year from 15.6 per cent achieved in FY26, largely due to the West Asia conflict and the evolving interest rate dynamics.
The rating agency said that the continuing conflict would lead to an uptick in slippages from the small businesses and unsecured loan exposures.
Credit growth will moderate to 11-11.7 per cent, which will involve an expansion of up to Rs 25 lakh crore to take the overall outstanding credit to around Rs 237 lakh crore at the end of March 2027, it said.
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Elevated global uncertainties, including the West Asia war, and higher crude oil prices will begin to reflect in macroeconomic and financial conditions and will lead to the moderation in the credit growth, its sector head, Sachin Sachdeva, said.
Banks will be cautious while lending to vulnerable segments like micro, small and medium enterprises (MSMEs), which are likely to bear the brunt of supply chain disruptions, he said, pointing out that this has been a key growth driver in the recent past.
The agency said that deposit growth continued to lag the credit growth in FY26, but we saw some pickup towards the end of the fiscal year as banks started pushing to raise funds.
The deposit mobilisation at finer rates remains a key challenge, it said, noting that net interest margins will continue to be under pressure as the cost of deposits is not expected to decrease materially.
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Banks' ability to raise deposits at better rates would be important for sustainable credit growth and adequate profitability, the agency said, reminding that lenders have opted to draw down on surplus liquidity buffers in FY26, like reducing the excess statutory liquidity ratio (SLR) holdings to support credit growth.
On the asset quality front, it said the ongoing geopolitical uncertainties will likely cast a shadow over MSMEs and unsecured retail loans, which would push up the slippage rate, leading to a slight increase in gross non-performing advances (GNPA).
GNPA would stay benign at 2.0-2.1 per cent in FY27, it said, basing the estimate on the assumption of an average crude oil price of USD 85 per barrel and a 6.5 per cent economic growth.
Sachdeva said the private sector lenders have a higher exposure to the two segments, which are likely to come under stress, and are continuing to report higher stress than their state-run rivals.
The agency expects bank profitability to decline slightly but remain healthy in FY27, supported by moderate operating expenses and rising but manageable credit costs.
"Overall, Icra maintains a 'Stable' outlook on the Indian banking sector for 2026-27, underpinned by comfortable capitalisation, manageable asset quality risks, and steady profitability, even as growth moderates from recent highs amid the complex global macroeconomic environment, leading to pressure on the asset quality," Sachdeva said.
The rating agency said that the continuing conflict would lead to an uptick in slippages from the small businesses and unsecured loan exposures.
Credit growth will moderate to 11-11.7 per cent, which will involve an expansion of up to Rs 25 lakh crore to take the overall outstanding credit to around Rs 237 lakh crore at the end of March 2027, it said.
Also Read | RBI in talks with global regulators, banks to review Mythos risks, sources say
Elevated global uncertainties, including the West Asia war, and higher crude oil prices will begin to reflect in macroeconomic and financial conditions and will lead to the moderation in the credit growth, its sector head, Sachin Sachdeva, said.
Banks will be cautious while lending to vulnerable segments like micro, small and medium enterprises (MSMEs), which are likely to bear the brunt of supply chain disruptions, he said, pointing out that this has been a key growth driver in the recent past.
The agency said that deposit growth continued to lag the credit growth in FY26, but we saw some pickup towards the end of the fiscal year as banks started pushing to raise funds.
The deposit mobilisation at finer rates remains a key challenge, it said, noting that net interest margins will continue to be under pressure as the cost of deposits is not expected to decrease materially.
Also Read | India banks’ credit growth seen outpacing deposits in FY27: Analysts
Banks' ability to raise deposits at better rates would be important for sustainable credit growth and adequate profitability, the agency said, reminding that lenders have opted to draw down on surplus liquidity buffers in FY26, like reducing the excess statutory liquidity ratio (SLR) holdings to support credit growth.
On the asset quality front, it said the ongoing geopolitical uncertainties will likely cast a shadow over MSMEs and unsecured retail loans, which would push up the slippage rate, leading to a slight increase in gross non-performing advances (GNPA).
GNPA would stay benign at 2.0-2.1 per cent in FY27, it said, basing the estimate on the assumption of an average crude oil price of USD 85 per barrel and a 6.5 per cent economic growth.
Sachdeva said the private sector lenders have a higher exposure to the two segments, which are likely to come under stress, and are continuing to report higher stress than their state-run rivals.
The agency expects bank profitability to decline slightly but remain healthy in FY27, supported by moderate operating expenses and rising but manageable credit costs.
"Overall, Icra maintains a 'Stable' outlook on the Indian banking sector for 2026-27, underpinned by comfortable capitalisation, manageable asset quality risks, and steady profitability, even as growth moderates from recent highs amid the complex global macroeconomic environment, leading to pressure on the asset quality," Sachdeva said.
