Banking credit offtake is likely to improve in FY27 whereas deposits are set to lag behind, according to a recent report by CareEdge Ratings. It expects credit growth to stay within 13-14.5 per cent in FY27. Credit growth remains healthy, expanding by 14.5 per cent YoY as of December 31, 2025, compared to 11.8 per cent a year earlier, it adds. This growth has been supported by continued retail demand (notably auto loans), MSME lending, renewed credit to NBFCs, and a pickup in industrial and opportunistic corporate borrowing. As per the report, India’s bank credit outlook remains resilient but increasingly depends on the course of geopolitical risks and crude oil prices.
The report points out that India’s banking sector has undergone a structural improvement in recent years, with lower stressed assets and stronger bank balance sheets supporting credit expansion. Credit growth slowed to about 5 to 6 per cent during FY20–FY21 despite policy rate cuts, mainly due to pandemic-related disruption in demand. As economic activity recovered, credit growth accelerated in FY23–FY24 even though the policy rate increased to 6.5 per cent. Meanwhile, credit growth moderated to 11.4 per cent in FY25, largely driven by retail and MSME lending.
Overall, credit growth in India is influenced by economic activity, liquidity conditions, and regulatory factors. The report points out that strong bank balance sheets, low NPAs, and steady domestic demand continue to support credit growth. Retail lending, government-linked infrastructure financing, and public capex are likely to remain the main growth drivers, with banks adjusting their portfolios rather than cutting lending entirely. RBI’s liquidity and currency interventions have further helped stabilise financial conditions and maintain near-term credit momentum.
The report points out that there are downside risks if the west Asia conflict becomes prolonged and crude prices remain above $100 per barrel. At the same time higher imported inflation could constrain monetary policy, raise borrowing costs, and weaken demand, prompting tighter lending standards, particularly for MSMEs, energy intensive industries, transport, aviation, and unsecured retail credit. The report says that while systemic stress remains unlikely, credit growth could slow as risk premiums and credit costs increase. Overall, the conflict is more likely to reshape credit composition and pricing than derail India’s credit cycle.
The report highlights that personal loan growth remained broadly stable across key retail categories, with vehicle loans—such as three-wheeler sales, which jumped 18.8 per cent YoY to 1.27 lakh units in January 2026, compared to 1.07 lakh last year emerging as a key driver of growth. This was supported by improved affordability following the GST rate cut and strong buyer sentiment, while credit card lending moderated. Going forward, personal loan growth would be supported by steady consumer demand. However, elevated fuel costs due to the Middle East war could weigh on household spending and moderate demand across select retail segments. If geopolitical tensions ease and price pressures stabilise, the impact on retail credit is likely to remain contained.
At the same time MSME credit has maintained a strong and sustained upward trend, rising from Rs 17.8 lakh crore in FY21 to Rs 31.1 lakh crore in FY25, nearly doubling over the five years. Growth peaked at 20.6 per cent in FY24, driven by improved demand conditions and continued policy support, before easing to 14.1 per cent in FY25, indicating normalisation after a high-growth phase.
MSME segment remains relatively more vulnerable to external shocks, particularly logistics disruptions and supply chain constraints.
The CareEdge Ratings report also indicates that AI and digitalisation is expected to support sustained credit growth. India is emerging as a rapidly growing AI-driven banking market, with lenders increasingly incorporating AI into processes such as underwriting, onboarding, document verification, and monitoring. Alongside the swift increase in digital transactions and regulatory comfort with digital lending, this boosts operational efficiency and enables banks to expand lending without proportionally raising costs.
The report says that while the banking system's liquidity remains in surplus, it has tightened compared to earlier periods and shown increased volatility. Nonetheless, signs of improvement are evident, and liquidity is expected to remain broadly in surplus. Deposit growth for SCBs is expected to moderate to around 11-12 per cent in FY27, compared with the stronger expansion seen in FY24. This trend is primarily driven by a shift in household savings toward higher-yielding alternatives, along with increased competition from term deposits and digital investment avenues, which are drawing funds away from low-yield CASA balances.
The decline has been further accentuated by banks reducing savings deposit rates to protect margins. The moderation in deposit growth is being shaped by multiple factors. Competition from alternative investment options such as mutual funds, equities and small savings schemes has diverted a portion of household savings away from traditional bank deposits, particularly impacting. As a result, banks are increasingly relying on term deposits and other market borrowings to support credit growth.
“India’s macroeconomic outlook remains supportive for the banking sector, with real GDP growth expected to expand by 7.2 per cent in FY27, alongside inflation anchored around 4 per cent, thereby underpinning credit demand across retail, MSME, and corporate segments. The central bank’s proactive liquidity management is expected to ease funding pressures, particularly during seasonal tightness. However, the intense war situation in the Middle East, elevated crude prices, and supply chain disruptions may create short-term pressures on input costs and credit growth,” remarked Sanjay Agarwal, Senior Director, CareEdge Ratings.
