India Ratings sees FY26 credit growth at 13-13.5% amid NBFC drag

India Ratings expects credit growth to rise modestly in FY26, led by industrial capex and public bank disbursements, even as retail and NBFC lending cools

India Ratings and Research (Ind-Ra) expects credit growth to improve marginally in FY26 to 13–13.5 per cent, up from FY25 levels. However, the composition of loans is likely to shift, with a continued slowdown in lending to non-banking financial companies (NBFCs) and the retail segment. This decline is expected to be offset by a revival in private capital expenditure (capex), which would support growth in the corporate segment, the rating agency said.

 

“A sustained improvement in system liquidity, coupled with reductions in the repo rate and cash reserve ratio (CRR), is expected to support near-term credit growth, which has recently slowed to around 9 per cent year-on-year,” said Karan Gupta, head and director of financial institutions at Ind-Ra. “However, deposit growth may come under pressure as banks accelerate the repricing of deposits.”

 

 

In April 2025, credit growth stood at 9.9 per cent, a notable decline from 19.4 per cent in April 2024. This drop was largely attributed to a high base effect and slower growth in retail and NBFC lending. Based on April 2025 data, Ind-Ra estimates that of the 9.9 per cent year-on-year credit growth, 34.6 per cent came from the retail segment, 29.8 per cent from services, 22.6 per cent from industry, and 13.4 per cent from agriculture. Notably, unsecured retail loans accounted for 27 per cent of the incremental year-on-year growth in the retail loan segment in April. 

 

Within the services sector, NBFCs showed subdued growth of just 2.9 per cent in April, contributing 9.3 per cent to overall non-food credit, according to Ind-Ra.

 

Credit growth to the industrial sector peaked at 16.4 per cent year-on-year in October 2022 but declined to 5.2 per cent in July 2023 and stood at 6.6 per cent in April 2025. The large industry segment grew only 4.5 per cent in April 2025, reflecting a lack of government expenditure in FY25. However, credit to micro and medium enterprises rose by 9.1 per cent and 18.1 per cent, respectively, during the same period.

 

Public sector banks have already extended higher loan sanctions to the industrial sector. Ind-Ra expects this to translate into actual disbursements in FY26, particularly in areas supported by the government’s Production-Linked Incentive (PLI) scheme, renewable energy, and infrastructure projects.

 

On the deposit front, Ind-Ra projects deposit growth at 12–13 per cent year-on-year in FY26, higher than FY25. This increase will be driven by intensified competition among banks to attract low-cost current account and savings account (CASA) deposits. With the loan-to-deposit ratio (LDR) hovering around 80 per cent, the cumulative 100-basis-point cut in the repo rate since February 2025 has reduced funding costs and may relieve some pressure on CASA mobilisation. Term deposit rates appear to have peaked, with several banks cutting rates across various tenors during the ongoing easing cycle.

 

As of 30 May 2025, deposit growth in the banking system stood at 9.9 per cent, slightly outpacing credit growth of 9 per cent.

 

In Q4 FY25, banks recorded net interest income (NII) growth of just 3.9 per cent, down from 10.1 per cent in Q4 FY24. This deceleration was driven by slower loan growth, reduced momentum in retail lending, and a sharp decline in NBFC lending. The LDR remained elevated at 80.3 per cent. While overall margins were under pressure, most large private banks reported sequential improvement in net interest margins (NIMs), whereas public sector banks experienced slight moderation.

 

“With repo rate cuts underway, lending yields have started to decline. However, deposit rates are expected to remain high through the first half of FY26, as banks continue to reprice deposits. This dynamic will keep margins under pressure in the short term,” Ind-Ra noted. “The weighted average lending rate on outstanding loans is already trending downward, signalling the early stages of monetary policy transmission. Additional rate cuts could further support credit growth. Although deposit rates may adjust with a lag, this evolving scenario could help stabilise and eventually support NIMs by end-FY26.”