Bank credit growth, sluggish in the first five months of the current fiscal, is expected to accelerate in the second half with consumer demand getting a lift from the GST rate cuts and falling deposit costs.

While corporate loan growth is likely to be slower in the full-fiscal, retail credit will accelerate. The overall loan book will see double-digit growth in FY26 as funding costs ease, despite some asset quality stress.

Two credit rating agencies have put the bank credit growth for FY26 at different levels but said that it would gain traction in the second half. While Crisil has estimated the loan growth to inch up to 12% in FY26, ICRA has pegged it at 10.4-11.3%. 

"The Q1 credit growth was slower at 9.5% and while it has inched up to 10%, it is still subdued. However, we expect the second half to lead to faster loan growth, which should take FY26 loan growth to 11-12%," Crisil chief rating officer Krishnan Sitaraman said.

Credit growth stood at 10.9% in FY25 and 16.3% in FY24.

As per ICRA’s forecast, bank credit would in absolute terms add Rs 19-20.5 trillion in incremental disbursements for FY26, up from Rs 18 trillion in FY25. This would come on the back of easing funding costs and growth supporting policy measures despite some asset quality stress, said Anil Gupta, co-group head, financial sector ratings at ICRA. 

Crisil also flagged some concerns over asset quality, triggered by a decline in households' contribution to deposit accretion, which could lead to issues over deposit stability and lending to small businesses. The share of household contributions to the deposit base has dropped to 60% from 64% over the last five years.

Banks would particularly need to keep an eye on loans under Rs 10 lakh to small businesses, Crisil said. Stress would also be felt by some US or export dependent small businesses if the 50% tariffs imposed by President Donald Trump would not get revised. 

The agency estimated the gross non-performing assets (NPAs) ratio to go up to 2.3-2.5% by the end of FY26, but said that this would be very low when compared with the historical highs.

ICRA also felt that there is rising stress level in retail and small business loan segments, impacting both banks and non-banking financial companies (NBFCs). “However, with economic activity expected to pick up after GST rate cuts, domestic demand would likely revive and lending appetite improve”, Gupta said.

The liquidity in the banking system would get a boost with the Reserve Bank of India’s (RBI) cut in cash reserve ratio (CRR) by a percentage point coming into effect from 6 September and spreading across four tranches of 25 basis points each until 29 November of this year. This would infuse Rs 2.5 lakh crore into the banking system by the end of November, thereby boosting lending capacity.

Corporate borrowers tapping alternatives like bond markets could reverse as lending rates fall, shifting demand back to bank loans. Private capex demand growth, however, may take some time to revive as companies are likely to opt for global trade uncertainties to settle before making big investment decisions, said Sitaraman.

ICRA expects NBFCs to see credit expand by 15-17% in the current financial year compared to 17% in FY25 and 24% in FY24, despite a slower start. 

Incremental bank credit during the first five months of FY26 lagged at Rs 3.9 trillion compared to Rs 5.1 trillion in the same period last year. But with the upcoming CRR cut and GST rationalisation, ICRA said it expects credit growth at the higher end of its estimated range of 10.4-11.3% for banks and 15-17% for NBFCs.

While credit costs are expected to rise, easing funding costs would support lenders’ margins and overall earnings. “We expect the credit cost of banks and NBFCs to go up by nearly 13 bps and 30 bps, respectively, over FY25 levels, with the impact being more pronounced in the non-housing segments,” said AM Karthik, co-group head financial sector ratings at ICRA.

Credit cost pressures will be more visible in unsecured and small-ticket loans. 

As of July 2025, loans to MSMEs (micro, small and medium enterprises) and unsecured personal loans accounted for 17% of banks’ non-food credit of Rs 184 trillion. Loans to small businesses and unsecured personal and consumption loans comprised nearly 34% of the total NBFC credit of Rs 35 trillion as of March 2025.