Domestic bank credit growth is expected to remain healthy at 14.5-15.5% this fiscal, marginally higher than last fiscal, with retail and MSME lending, along with a shift by corporates towards bank funding, likely to drive expansion, according to Crisil Ratings.
The rating agency said continued corporate preference for bank loans over market borrowings, supported by favourable rate differentials, will be another key driver of credit growth. Easing liquidity conditions following Foreign Currency Non-Resident (Bank), or FCNR(B), deposit inflows have also reduced pressure on domestic deposit growth and supported the credit outlook.
Credit growth to normalise from August levels
While bank credit growth is expected to remain healthy, it is likely to moderate from the around 19% YoY growth recorded as of August 2026.
Crisil Ratings attributed the expected moderation to a high base, with credit growth in the second half of the previous fiscal accelerating sharply to around 20% on an annualised basis after growing about 8% in the first half.
The impact of policy measures that supported credit growth in the second half of the previous fiscal is also expected to gradually fade. These measures included GST rationalisation, lower interest rates and income tax concessions.
“While credit growth for this fiscal is seen healthy, it is likely to normalise from the ~19% y-o-y level seen as of August 2026,” said Krishnan Sitaraman, Chief Ratings Officer, Crisil Ratings.
Corporate credit growth seen at 10-11%
The corporate segment, which accounts for around 36% of domestic bank credit, is expected to maintain steady growth of 10-11% this fiscal, marginally above the approximately 9.8% recorded last fiscal.
Crisil Ratings expects continued reverse substitution from the bond market to bank loans to support corporate credit. Bond yields are expected to remain elevated and reprice upwards faster than bank lending rates amid rising interest rates, making bank funding relatively more attractive.
Higher working capital requirements amid ongoing geopolitical uncertainties are also expected to support corporate borrowing.
Lending to non-banking finance companies, which account for around 26% of banks’ corporate credit portfolio, is expected to remain healthy, although growth is likely to normalise from the strong levels seen in the second half of last fiscal.
MSME credit remains fastest-growing segment
MSME lending, which accounts for around 18% of domestic bank credit, is expected to remain the fastest-growing portfolio, with credit growth projected at 23-25% this fiscal.
The growth forecast is broadly in line with the approximately 23% expansion recorded last fiscal.
The segment continues to benefit from government and regulatory measures, including the Emergency Credit Line Guarantee Scheme (ECLGS) 5.0. Lines of around ₹2.1 lakh crore were extended to MSMEs between May and August 2026 under the scheme, supporting credit growth.
Improved operational and digital infrastructure, along with greater availability of data, has also strengthened banks’ risk assessment capabilities and their ability to lend to MSMEs.
Retail credit growth seen at 15-16%
Retail loans, which account for about 33% of domestic bank credit, are projected to grow 15-16% this fiscal, broadly in line with the approximately 15% growth recorded last fiscal.
Gold loans are expected to remain the fastest-growing retail credit segment after more than doubling last fiscal. However, growth is likely to moderate from the elevated levels of last year because of a higher base.
Unsecured retail lending, meanwhile, is expected to remain range-bound as borrowers continue to favour gold loans as a relatively cost-effective and accessible source of credit.
Housing loans, which account for nearly 48% of banks’ retail credit portfolio, are expected to maintain steady growth. However, the impact of higher policy rates on housing loan demand remains a key monitorable.
Vehicle financing has also maintained strong momentum, supported by underlying vehicle sales, GST-related tailwinds and replacement demand. Growth is expected to moderate in the second half as these tailwinds recede, although the segment is likely to remain healthy.
Agriculture credit growth may moderate
Agricultural credit growth is expected to moderate to 13-15% this fiscal from more than 15% in fiscal 2026.
Crisil Ratings said climatic risks, including El Niño, could pose a headwind by affecting farm output and incomes.
Inflationary pressures arising from a prolonged West Asia conflict, combined with a rising interest rate environment, could also weigh on retail consumption demand and pose downside risks to overall credit growth.
FCNR(B) deposits ease funding pressure
On the funding side, strong inflows of FCNR(B) deposits have temporarily eased liquidity pressures on banks, supporting the outlook for credit expansion.
The gap between credit growth and domestic deposit growth exceeded 500 basis points in the first quarter before narrowing sharply in September following FCNR(B) deposit inflows.
FCNR(B) deposits mobilised by banks stood at around 4.6% of banking system deposits as of March 2026, providing a sizeable funding buffer for credit growth.
“FCNR(B) deposits mobilised by banks, at around 4.6% of banking system deposits as of March 2026, provide a sizeable funding buffer for credit growth,” said Subha Sri Narayanan, Director, Crisil Ratings.
However, only part of these inflows may translate into incremental lending, as banks could use some of the funds to replace previously contracted higher-cost liabilities.
The Reserve Bank of India’s liquidity absorption measures and underlying credit demand will determine the extent to which the funds are deployed towards lending.
Deposit mobilisation remains key
Crisil Ratings said sustaining credit growth beyond the current phase will require banks to develop more durable deposit mobilisation strategies and strengthen their liability franchises.
Overall, the outlook for bank credit growth this fiscal remains favourable, supported by robust domestic demand and adequate liquidity. However, geopolitical uncertainties and their potential impact on economic growth and inflation remain key downside risks to the credit growth outlook.