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Informist, Wednesday, Nov. 12, 2025

 

NEW DELHI – ICRA Ltd. has scaled up its estimate of banking sector credit growth in 2025-26 (Apr-Mar) to 10.7-11.5% on year from 10.4-11.3%, an increase of INR 500 billion in absolute terms. However, the pace of increase between retail and corporate loans was hazy due to several uncertainties on both fronts after a stellar September quarter, driven by the festival season and goods and services tax cuts, the ratings agency said.

 

While retail and micro, small and medium enterprises drove robust credit growth until September, ICRA also said that a large part of the boost might have been for working capital requirements by supply-chain firms. Borrowers have likely brought forward their borrowing needs from the December quarter to the September quarter, which may lead to a slower pace of credit growth in the ongoing quarter, the ratings agency said. The pace of credit growth is likely to pick up again in the last quarter of the financial year.

 

The incremental credit offtake in FY26 may now be INR 19.5 trillion-INR 21 trillion, ICRA said, of which INR 10.1 trillion was in the first half of the financial year. Credit growth was sluggish until August, and over 60% of the incremental credit demand came after Aug. 22. Some borrowers also shifted to bank credit from the corporate debt market as yields hardened despite the repo rate cuts by the Reserve Bank of India's Monetary Policy Committee until June.

 

Sustained demand from corporates is yet to be seen, especially as further rate cuts or the possibility of those may lead them away from bank credit to debt capital markets, ICRA said. Higher rated borrowers may also tap the external commercial borrowing market as advanced economies, including the US, have begun cutting interest rates, Anil Gupta, co-group head of financial sector ratings at ICRA, said. Forward premiums have fallen over the past month amid the RBI's persistent forward dollar sales, which also makes it cheaper to borrow externally.

 

Even with this credit offtake, asset quality is likely to remain robust with limited stress events expected. Still, the concentration of credit growth in the retail and MSME sector may lead to an increase in the pace of fresh slippage. ICRA projects the average fresh slippage generation rate at 1.0% in FY26 for state-owned banks, against 0.9% in Apr-Jun and 0.7% in Jul-Sept. Slippage generation from private sector banks may be 2.0% on average in FY26, against 2.1% in the June quarter and 1.7% in the Septmeber quarter.

 

On a banking system level, the gross non-performing asset ratio may be 2.1-2.3% by March-end, against 2.1% as of September-end, ICRA said. Banks have elevated levels of provision coverage that is unlikely to change, helping maintain a low net NPA ratio and prepare them for the transition to expected credit loss norms as well, the ratings agency said. The net NPA ratio may remain at 0.4-0.5% at the end of March, similar to 0.5% currently.

 

The RBI has set out draft norms for a move to the forward-looking expected credit loss framework, which are currently proposed to be phased in starting Apr. 1 with a transition period till March 2031. On a systemic level, ICRA's estimate of the impact of the draft norms remains below a 150-basis-point decline in banks' core capital ratios. From the changes to the norms for stage-II assets alone, the ratings agency sees a hit of 10-20 bps on the common equity tier-I ratio. Banks will reportedly ask the RBI to reduce the provisioning for certain stage-II assets before the final norms are released.

Banks with a higher unsecured loan book or loss-given defaults, largely private sector banks, will see a greater capital hit. Lenders with a swollen book of special mention accounts may also have to provide higher than the average. However, the annual pace of capital hit is likely to be manageable, given the five years of transition, the ratings agency said.

 

In FY26, banks are likely to remain self-sufficient and the ones with the lowest capital cushions as of September-end are well placed to raise capital from the market, ICRA said. The banks with the lowest tier-I capital ratios on Sept. 30 were IDFC FIRST Bank, State Bank of India, Jammu & Kashmir Bank, YES Bank, RBL Bank and DCB Bank, though these remain at least 280 bps above the minimum regulatory requirement of 9.5%. 

 

"Sanctioned but undisbursed exposures and off-balance sheet items like non-fund-based limits and derivatives etc. would also have some impact on the capital ratios," ICRA said. Bank of Baroda provided INR 4 billion in the September quarter for the shift to the expected credit loss norms, and said it would have to provide even more in the coming quarters.  

 

The norms also propose to reduce the risk weights on a bevy of bank credit lines such as project finance, MSMEs and housing loans. Risk weights on lower-rated corporates has also gone down. These will benefit banks' capital adequacy ratio as well, even though some banks with exposure to commercial real estate – the segment where risk weights have increase – may underperform.

 

ICRA also said that net interest margins of banks had bottomed out in the September quarter if there are no further repo rate cuts, a base case that is contrary to their economists' views of further rate cuts in FY26. A rate cut in December could then put pressure on the net interest margin so much so that the bottom may be seen in Jan-Mar, as loans reprice quicker than deposits. ICRA said that some banks may cut savings account rates to protect margins as the reduction in these rates earlier this year had not led to a material slowdown in the growth of savings account deposits.  End 

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Aaryan Khanna

Edited by Avishek Dutta

 

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