India's Credit Growth Set for Expansion Amid Rate Cuts and Liquidity Measures

ICRA projects a 10.8% growth in India's credit for 2025-26, fuelled by the repo rate cut and RBI liquidity measures. Despite challenges like deposit mobilisation and rising stress in unsecured loans, the banking sector anticipates a significant credit expansion after slower growth in early FY2025.

Rating agency ICRA forecasts a 10.8% increase in India's credit growth for the fiscal year 2025-26. Factors such as the repo rate reduction, delayed changes in the liquidity coverage ratio, and eased provisions on infrastructure projects support this growth outlook, according to ICRA.

Additionally, the Reserve Bank of India's enduring liquidity infusion through open market operations, via purchasing government bonds and executing forex swaps with banks, is expected to bolster liquidity and accelerate the effects of recent policy rate cuts. However, ongoing challenges in deposit mobilisation, a high credit-deposit ratio, and rising strain in unsecured retail and small business loans continue to weigh down credit expansion prospects.

According to Sachin Sachdeva, Vice President and Sector Head at ICRA, the pro-growth regulatory stance has reignited lenders' interest in credit growth in the last quarter of FY2025, following a period of slow progression. ICRA estimates credit growth at around Rs. 19.0-20.5 trillion, reflecting a 10.8% increase in FY2026, compared to an Rs. 18.0 trillion expansion or a 10.9% rate in FY2025. Challenges in attracting competitively priced deposits remain, along with rising competition from other investment avenues impacting banks' cost of funds. These issues may hinder the swift transmission of RBI's rate cuts.

(With inputs from agencies.)