6 days ago
Indian Banks See Strong Credit Growth Amid Near-Term Challenges
Indian banks are lending money faster than they are collecting deposits.
This has helped credit growth remain strong, and one forecast now puts it at 15% for the financial year ending March 2026.
Deposits may rise temporarily because foreign customers are placing more money in special bank accounts.
However, banks’ loans are already about 85% as large as their deposits, which is a high level.
Banks may also earn less from each loan because interest-rate spreads are narrowing.
They could face somewhat higher losses from loans that are not repaid.
Smaller non-bank lenders may have more difficulty raising enough capital to grow.
Overall, analysts expect lending growth to slow later in the financial year.
India Ratings raised its FY26 credit-growth forecast to 15% from 13%, citing sustained double-digit expansion.
Deposit growth has lagged credit growth but may receive a temporary boost from FCNR(B) deposit inflows.
Banks’ loan-to-deposit ratio reached about 85%, an elevated level that could constrain lending capacity.
Profitability faces pressure from muted net interest margins and expected increases in credit costs.
India Ratings expects loan growth to normalize in the second half of the financial year as margins remain under pressure.
- Who
- Indian banks, non-bank finance companies, India Ratings and Research, and the Reserve Bank of India.
- What
- Banks are experiencing strong credit growth but face elevated loan-to-deposit ratios, margin pressure, and higher expected credit costs.
- Where
- India.
- When
- The forecasts concern the financial year ending March 2026 and FY27; the FCNR(B) inflow data is as of August 22.
- Why
- Credit growth has consistently exceeded deposit growth, while compressed spreads, reliance on bulk funding, and expected higher credit costs are weighing on profitability.
Key facts
- FY26 credit-growth forecast
- 15%, raised from 13% by India Ratings and Research
- FY27 deposit-growth forecast
- 13.6%, raised from 11.4%
- Loan-to-deposit ratio
- Approximately 85% in the latest quarter
- Expected FY27 system credit costs
- 74 basis points, compared with 65 basis points the previous year
- Expected credit costs by bank type
- 95 basis points for private banks and 60 basis points for public-sector banks
- FCNR(B) deposits raised
- Approximately $65.4 billion as of August 22, according to Reserve Bank of India data
- Expected normalized deposit growth
- Officials expect deposit growth to return to approximately 11%-13% after the temporary inflow boost
Quotes
Karan Gupta
Head and Director of Financial Institutions at India Ratings and Research
“Pressure on profitability for the sector is likely to emanate from muted NIMs, as well as our expectation of slightly elevated credit costs.”
businesstoday.in
“For the quarter gone by, we were at an almost elevated level of 85 per cent, which is the highest we have seen in so many quarters.”
businesstoday.in
Sources
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