Regulatory easing to support 10.8% incremental credit growth in FY26: ICRA
The rating agency ICRA estimated the incremental credit to rise by 10.8 per cent to Rs 19-20.5 trillion in the current fiscal (FY26) compared to Rs 18 trillion or a 10.9 per cent growth in 2024-25. The agency expects the regulatory easing seen in recent months to support a credit expansion of about 10.8 per cent in FY2026. The regulatory measures include the repo rate cut, deferment of proposed changes in the liquidity coverage ratio (LCR) framework and additional provisions on infra projects, along with the roll-back of increased risk weights on lending to unsecured consumer credit and non-banking financial companies (NBFCs).
Besides, the rating agency also expects that the durable liquidity infusion by the Reserve Bank of India (RBI) through open market operations (OMO) by way of purchases of Government bonds and forex swaps with banks, would aid the liquidity and faster transmission of the ongoing cut in policy rates. It added that the pace of credit expansion is expected to trail the recent highs seen in FY2024. However, the persisting challenges in deposit mobilisation, high credit-deposit (CD) ratio and rising stress in the unsecured retail and small business loans would remain a drag on credit growth. It has also indicated that pro-growth regulatory stance has revived the lenders' appetite for credit growth in Q4 FY2025 after a brief period of slow incremental credit growth in the initial period of FY2025. Meanwhile, the RBI’s recent announcements of liquidity injections are likely intended to nudge a faster transmission of rate cuts.
According to ICRA, the one the key challenges faced by the banking sector in the last few years is raising deposits at competitive pricing, especially retail deposits, given the pressure on the liquidity coverage ratio (LCR), meanwhile, the increasing competition from other investment avenues and the investors' preference for term deposits have led to a reduction in the share of low-cost current and savings account (CASA) balances, impacting the banks' cost of funds. The rating agency expects these to persist in the near term, which is likely to delay the transmission of rate cuts by the RBI to banks' cost of funds, in spite of the recent liquidity measures, thereby impacting the banks' margins.
