Daijiworld Media Network – Mumbai
Mumbai, Apr 8: The Reserve Bank of India’s recent policy easing steps are expected to support a year-on-year credit growth of around 10.8 per cent, translating to an expansion of Rs 19 lac cr to Rs 20.5 lac cr in the financial year 2025-26, according to a report released by ICRA on Tuesday.
The supportive measures include a repo rate cut, deferment of proposed changes to the liquidity coverage ratio (LCR) framework, and rollback of increased risk weights on lending to unsecured consumer credit and non-banking financial companies (NBFCs). Additionally, the RBI’s durable liquidity infusion through open market operations (OMO) and forex swaps is set to aid the monetary transmission.
Despite these positives, ICRA noted that challenges in deposit mobilisation, an elevated credit-deposit (CD) ratio, and rising stress in unsecured retail and MSME loans could restrict the pace of credit expansion, which is expected to moderate from the highs seen in FY2024.
“The pro-growth regulatory stance has revived the lenders’ appetite for credit growth in Q4 FY2025 after a brief lull earlier in the year,” the report stated.
Persistent issues such as stiff competition for retail deposits and a declining share of low-cost current and savings account (CASA) balances continue to pressure banks' cost of funds. This is expected to delay the pass-through of rate cuts to borrowers, even as the RBI steps up its liquidity support.
Furthermore, with a high CD ratio, banks have become more reliant on wholesale deposits, leading to a steady decline in average LCR across the sector.
ICRA vice president Sachin Sachdeva said: “With the elevated CD ratio, competition for deposit mobilisation is likely to remain high in FY2026, limiting banks’ ability to reduce deposit rates. Lending rates, however, may come under pressure due to declining benchmark-linked loan rates and competition from debt markets.”
He added that while net interest margins (NIMs) are expected to decline by 15-17 basis points during FY2026, profitability metrics like return on assets (ROA) and return on equity (RoE) would remain at a comfortable 1.1-1.2 per cent and 12.1-13.4 per cent respectively.
Sachdeva concluded that the sector’s stable earnings outlook will likely support projected credit growth without significant fresh capital infusion, resulting in ICRA maintaining a ‘Stable’ outlook for the Indian banking sector.