New Delhi [India], March 31 : The credit growth of India's banking sector is likely to rise to 13 per cent in the financial year 2025-26 (FY26) from the current level of 11.2 per cent, according to a report by Anand Rathi.
The report highlighted key factors contributing to this growth, including liquidity infusion, regulatory easing, and government spending.
In the past three months, the banking sector has witnessed strong liquidity support due to measures like the Cash Reserve Ratio (CRR) cut and a reduction in Risk-Weighted Assets (RWA) for lending to Non-Banking Financial Companies (NBFCs). These steps indicate a more accommodative regulatory approach by the Reserve Bank of India (RBI).
Additionally, the government's tax reduction policy, which is expected to boost consumption by Rs 900 billion, the report said "This, coupled with the government's capex can potentially drive 100bps higher credit growth to 13 per cent in FY26e vs. 11.2 per cent now".
The report suggested that credit growth is expected to pick up in the second half of FY26 as liquidity conditions improve. While unsecured lending such as personal loans (PL) and credit card (CC) loans have shown signs of bottoming out, they are likely to gain momentum, particularly for large banks.
On the other hand, secured lending, including loans to Micro, Small, and Medium Enterprises (MSME) and housing loans, remains stable and is expected to receive further support from RBI's initiatives.
Another key trend observed in the banking sector is the relationship between term deposit rates (for 1-3 years) and the weighted average term deposit rate (WATDR). With the increase in deposit rates slowing down, the report suggests that interest rates may be nearing their peak.
Despite tight liquidity conditions in certain months, certificate of deposit (CD) rates have also shown signs of stabilizing. This could lead to a marginal increase in deposit growth as liquidity conditions ease further.
The report also sheds light on trends in the Credit-Deposit (CD) ratio. While private banks are reducing their CD ratios, public sector banks (PSBs) are increasing them, which is restricting overall credit growth. Private banks, which have a higher proportion of External Benchmark Lending Rate (EBLR)-linked loans (approx. 70 per cent) compared to PSBs (approx. 50 per cent), could face pressure on their Net Interest Margin (NIM) as interest rates decline.
However, the report states that gradual rate cuts will allow banks to adjust their deposit and lending rates, preventing any sharp decline in NIM.
Furthermore, the outstanding amounts for personal loans and credit cards are expected to rise from the third quarter of FY25, which will provide additional support to NIM.
Overall, with improving liquidity, regulatory support, and government initiatives, the banking sector is set to witness higher credit growth in the coming years.