Bank credit on firm footing despite global uncertainties, says Crisil

Bank credit growth will pick up in the second half of this fiscal helped by consumer loan demand due to tax cuts, lower rates and easier liquidity, rating agency Crisil said.

The agency expects credit growth for 2025-26 to clock in as 11% to 12% slightly better than the 11% recorded last fiscal even as it listed risks to GDP growth from a volatile external environment, possible non performing loans from export oriented micro small and medium enterprises ( MSMEs) and slow private capital expenditure as the key monitorables for the banking sector.

Krishnan Sitaraman, chief ratings officer, Crisil said the banking sector looks well poised to support economic growth and credit growth is likely to pick up in the second half of the current fiscal starting October.

"The drivers for credit growth include regulatory steps to ease system liquidity, GST cuts and normal monsoons which will aid rural income levels. This along with lower inflation could lead to softer rates and boost consumption," Sitaraman said.

Crisil expects retail credit demand to drive growth this year with loans from individuals growing at a faster clip at 13%, higher than the close to 12% growth seen last year. Retail loans constitute 33% of bank credit.

Growth in corporate loans will however be weaker at 9% compared to the close to 10% growth seen last fiscal as companies shop for the cheapest capital from equity to debt besides bank funding. Corporate loans make up 38% of bank credit according to Crisil.

Krishnan however said that the challenging external environment, slow private sector capital expenditure along with trends inhousehold indebtedness and challenges for sectors like MSME will be key monitorables for India.

Crisil said bank deposit growth is adequate for the expected uptick in bank credit, aided by the Reserve Bank of India’s measures to enhance systemic liquidity, including a four-phased cash reserve ratio reduction and revision in the liquidity coverage ratio norms.

Crisil expects unsecured loans to pick up this fiscal after a lull in the year ended March 2025 in light of the risk weights increase by RBI. Gold are also expected to continue to grow forming an engine for bank retail credit growth.

Crisil does not expect a deterioration in bank asset quality with total NPAs in the sector not exceeding 2.5% in the worse scenario which is slightly higher than the 2.3% recorded last year.

Export oriented sectors particularly those classified as MSME sectors and impacted by higher US tariffs like gems and jewellery, textiles and shrimp and seafood sectors could see some stress this year.

Overall growth in the MSME segment could see a 14% loan growth this fiscal helped by digitalisation and formalisation and improved risk-adjusted returns.

"However, banks are likely to exercise caution in some sub-segments including export-oriented units. Agricultural credit growth is seen reasonable at 10% this fiscal, supported by another season of adequate rains and its positive rub-off on harvest," Crisil said.