Credit Growth Set for Slower Pace Amid High CD Ratios, Report Highlights

ICRA's report indicates a slow credit growth in FY26, impacted by high CD ratios and changes in the liquidity coverage ratio framework. The banking sector faces reduced margins amid high interest rates, though capital ratios remain stable. Asset quality shows rising NPAs but minimal credit cost growth.

ICRA's latest report forecasts a slowdown in credit growth, projecting it to ease to 9.7-10.3% in FY26, influenced by persistent high credit-to-deposit (CD) ratios and anticipated changes in liquidity coverage ratio (LCR) policies.

The agency has revised its credit growth forecast for FY25 downwards to between 10.5% and 11% from an earlier estimate of between 11.6% and 12.5%, signaling a moderation in lending as banks curb their credit exposure to unsecured retail sectors and non-banking financial companies.

Though capital ratios of many banks remain robust, with no significant growth-driven capital needs anticipated for FY26, the implementation of the expected credit loss framework and increased funding provisions for project finance in the medium term will require close monitoring. Meanwhile, a slight rise in fresh NPAs is expected, though credit costs may see only a marginal increase, bolstered by fewer legacy net NPAs.

(With inputs from agencies.)