Bank Credit Growth to Ease to 13% This Fiscal; MSME, Retail Lead: CRISIL

The report said the growth will be supported mainly by strong demand from the retail and micro, small and medium enterprise (MSME) segments, along with corporates continuing to prefer bank loans over bond issuances.

"Bank credit is poised to grow ~13% this fiscal, driven by healthy growth in the micro, small and medium enterprise (MSME) and retail sectors, as well as the continued preference of corporates for bank credit rather than issuance of bonds amid the prevailing interest rate differential," the report said.

However, the pace of expansion will be slightly slower compared with last fiscal. "Overall, credit growth will be a tad slower than the estimate of ~14% for fiscal 2026," the report added.

The report noted that geopolitical developments, particularly tensions in West Asia, could influence the outlook for credit demand.

"The duration and intensity of the West Asia conflict and its effect on the macroeconomic landscape can also impact the credit growth calculus," it said, adding that a pick-up in deposit growth will also be crucial as the gap between credit and deposit growth has widened recently.

Corporate lending, which accounts for about 36 per cent of domestic bank credit, is expected to grow at a steady pace.

Subha Sri Narayanan, Director at CRISIL Ratings, said, "Credit growth in the corporate sector (~36% of domestic bank credit) is seen growing 9-10%, in line with ~10% in fiscal 2026."

She added that corporate borrowing from banks picked up in the second half of FY26 as loan rates became relatively cheaper compared with bond yields.

"After a subdued start, corporate credit growth accelerated in the second half of fiscal 2026, supported by lower interest rates on bank loans relative to corporate bonds," Narayanan said.

The report also highlighted that the ongoing geopolitical tensions may have mixed effects on corporate borrowing.

"The ongoing West Asia conflict would have a dual impact on wholesale credit growth," the report said, explaining that while uncertainties may delay private sector capital expenditure, supply-chain disruptions and higher input prices could increase demand for short-term working capital loans.

MSME lending is expected to remain the fastest growing segment for banks, though growth could moderate slightly from the previous year.

"This segment has been, and will remain, the fastest growing portfolio for the banking sector," the report said, adding that growth in FY27 "should still be upwards of 22% in the base case."

The report attributed this outlook partly to government initiatives aimed at improving credit access for smaller businesses.

Retail lending, which accounts for roughly one-third of bank credit, is also expected to maintain steady growth.

"Retail loans (~33% of bank lending) will continue to grow at a reasonable clip, at ~14%, in fiscal 2027," the report said.

However, the report warned that inflationary pressures linked to geopolitical developments could affect consumer demand.

"Inflationary pressures from a prolonged West Asia conflict and the resultant higher interest rates could weigh on retail consumption demand," it added.

Meanwhile, deposit growth will remain a key factor influencing banks' ability to sustain lending growth.

Vani Ojasvi, Associate Director at CRISIL Ratings, said banks are increasingly tapping alternative funding sources due to slower deposit growth.

"Regulatory measures such as the phased reduction in the cash reserve ratio have released liquidity for banks, providing support during the recent muted deposit growth," Ojasvi said.

She added that banks are also relying more on certificates of deposit to support lending.

"Against overall deposit growth of 10.8% on-year as on March 15, 2026, growth in CDs was ~27%, albeit on a much smaller base. However, this comes at a higher cost," she said.

The report concluded that while bank credit growth is expected to remain steady this fiscal, geopolitical uncertainties and funding dynamics will continue to shape the outlook for the sector.

- ANI