New Delhi, [India] September 10 : Indian banks incremental credit to grow by Rs 19 trillion to 20.5 trillion, translating into a year-on-year growth of 10.4-11.3 per cent according to a report by rating agency ICRA.
However, supported by improved economic activity and recent policy measures, non-banking financial companies (NBFCs), excluding infrastructure-focused entities, are estimated to register a 15 to 17 per cent expansion in the current fiscal.
According to ICRA, the momentum comes despite a slower start in the first five months of FY26, where incremental bank credit stood at Rs 3.9 trillion against Rs 5.1 trillion in the same period last year. The agency believes the recent GST rate cuts, coupled with an upcoming reduction in the cash reserve ratio (CRR), will stimulate domestic demand and support credit expansion across both banks and NBFCs.
"Asset quality stress in retail and MSME segments resulted in a slower growth for private sector banks as well as NBFCs. With improvement in economic activity post GST rate cuts, the growth appetite shall improve, which will support the credit growth." said Anil Gupta, Senior Vice President & Co-Group Head, ICRA. He added that asset quality stress in the retail and MSME segments had earlier slowed the pace for private sector banks and NBFCs, but demand revival should aid momentum going forward.
The rating agency noted that while credit costs are likely to rise modestly, lenders' earnings will remain supported by easing funding costs. ICRA expects banks' credit costs to increase by nearly 13 basis points (bps) and NBFCs' by around 30 bps in FY26 as compared with FY25. The pressure, it said, will be more pronounced in the non-housing segments.
"We expect the credit cost of banks and NBFCs to go up by nearly 13 bps and 30bps, respectively, vis a vis the previous fiscal, with the impact being more pronounced in the non-housing segments." said AM Karthik, Senior Vice President & Co-Group Head, ICRA.
The report highlights that as of July 2025, loans to MSMEs and unsecured personal loans accounted for 17 per cent of banks' non-food credit, which stood at Rs 184 trillion. For NBFCs, loans to small businesses and unsecured consumption loans comprised nearly 34 per cent of their total credit of Rs 35 trillion as of March 2025.
ICRA cautioned that evolving macroeconomic factors and global uncertainties could impact borrower segments, particularly export-dependent industries. For instance, transport operators linked to apparel exports or employees of such units could face income shocks, affecting their repayment capacity on loans such as microfinance, personal, or home loans.
Nevertheless, the agency maintained a stable outlook for banks and NBFCs, excluding the microfinance sector, where the outlook remains negative, citing strong capital buffers that are adequate to absorb potential stress. Smaller NBFCs with weaker capital positions and high overdue levels, however, are expected to face elevated risks and may find it difficult to absorb shocks due to limited refinancing flexibility.
Overall, the report underscored that while challenges remain, the combination of policy-driven demand revival, lower funding costs, and liquidity surplus positions the banking and NBFC sectors to achieve healthy growth in FY26.