Bank Credit Growth Projected to Slow to 12% in FY27 Amid West Asia War and Evolving Interest Rate Dynamics

Bank Credit Growth to Moderate in India Amid Global Uncertainties

According to a report released by domestic ratings agency Icra on Wednesday, bank credit growth in India is likely to moderate to under 12 per cent in the current financial year, down from the 15.6 per cent achieved in FY26. This moderation is attributed to the ongoing conflict in West Asia and the evolving interest rate dynamics.

The agency expects credit growth to slow down to 11-11.7 per cent, resulting in an expansion of up to Rs 25 lakh crore to take the overall outstanding credit to around Rs 237 lakh crore at the end of March 2027. Elevated global uncertainties, including the West Asia war, and higher crude oil prices will begin to reflect in macroeconomic and financial conditions, leading to the moderation in credit growth.

Banks will be cautious while lending to vulnerable segments like micro, small and medium enterprises (MSMEs), which are likely to bear the brunt of supply chain disruptions. This has been a key growth driver in the recent past. The agency noted that deposit growth continued to lag credit growth in FY26, but saw some pickup towards the end of the fiscal year as banks started pushing to raise funds.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

The agency highlighted that deposit mobilization at finer rates remains a key challenge, noting that net interest margins will continue to be under pressure as the cost of deposits is not expected to decrease materially. Banks' ability to raise deposits at better rates would be important for sustainable credit growth and adequate profitability.

On the asset quality front, Icra expects the ongoing geopolitical uncertainties to cast a shadow over MSMEs and unsecured retail loans, which would push up the slippage rate, leading to a slight increase in gross non-performing advances (GNPA). However, GNPA is expected to stay benign at 2.0-2.1 per cent in FY27, based on the assumption of an average crude oil price of USD 85 per barrel and a 6.5 per cent economic growth.

Private sector lenders are expected to have a higher exposure to the two segments, which are likely to come under stress, and are continuing to report higher stress than their state-run rivals. The agency expects bank profitability to decline slightly but remain healthy in FY27, supported by moderate operating expenses and rising but manageable credit costs.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

Icra maintains a 'Stable' outlook on the Indian banking sector for 2026-27, underpinned by comfortable capitalisation, manageable asset quality risks, and steady profitability, even as growth moderates from recent highs amid the complex global macroeconomic environment, leading to pressure on the asset quality.