Bank credit to improve to 11.5-12.5% in FY26, says CareEdge Ratings

Careedge expects stronger bank performance in FY26, with credit growth rising to 11.5-12.5% on consumption and corporate demand, even as weak deposit growth keeps the credit-deposit ratio high

Indian banks are expected to deliver a stronger performance in FY26 with improved asset quality and credit growth showing signs of revival, according to CareEdge Ratings.

 

The rating agency has projected overall bank credit growth of 11.5–12.5 per cent in FY26, lifted by a rebound in consumption following the GST cut and an uptick in corporate demand during the second half of the year. Bank loans grew at 11 per cent in FY25.

 

Sachin Gupta, executive director and chief rating officer, CareEdge Ratings, said, “The banking industry has demonstrated resilience, with non-performing assets (NPAs), particularly within public sector banks, now at their lowest levels. While banking credit offtake remains tepid, it has shown some improvement.”

 

Why is deposit growth a concern for banks?

 

However, deposit growth continues to lag, keeping the banking system’s credit–deposit ratio elevated at around 80 per cent. Public sector banks are expected to run down portions of their non-SLR (statutory liquidity ratio) portfolios to bridge the gap, while private sector banks may rely more on capital raised recently.

 

Sanjay Agarwal, senior director, CareEdge Ratings, said, “Deposit growth remains weak and hence the credit–deposit ratio is likely to move to 81 per cent. The private sector will have around 88 per cent, whereas the CD ratio for public sector banks will move up to 76.7 per cent from 75.8 per cent.”

 

What is the outlook for NIMs and treasury gains?

 

After several quarters of compression, net interest margins (NIMs) are expected to stabilise at about 2.8 per cent in FY26, slightly below last year’s levels. Treasury gains, however, are likely to remain limited as bond yields stay firm, putting greater emphasis on core income and cost control.

 

How will NBFCs perform relative to banks?

 

The non-banking financial sector is expected to continue outpacing banks in overall growth, yet performance varies sharply across segments. Secured, high-value retail lending remains robust, with strong traction in housing finance—both prime and affordable—and vehicle loans.

 

Gupta said that NBFCs have generally outperformed banks in credit growth, supported by overall improvements in asset quality. However, challenges within the NBFC space can be categorised across two segments: unsecured lending and small-ticket loans. Among these, small-ticket unsecured loans such as those extended by microfinance institutions (MFIs) and to MSMEs have been most adversely impacted.

 

Which lending segments are expected to lead growth?

 

Gold loans remain a bright spot, with expected growth of 35 per cent, supported by higher gold prices. Meanwhile, overseas education loans—a segment dominated by specialised NBFCs—may see slower disbursement growth due to visa and employment uncertainties abroad, though asset quality has not yet shown deterioration.

 

What structural shifts are emerging in NBFC funding?

 

The rating agency noted a structural shift is underway in NBFC funding, with large AAA-rated entities increasingly tapping external commercial borrowings (ECBs) and bond markets at competitive rates. As a result, the share of bank lending in NBFC liabilities has declined from 40 per cent to 38 per cent last year and is expected to fall further. Smaller NBFCs, however, remain dependent on banks and are seeing limited access to market borrowings.