Indian banks, NBFCs to see resilient credit growth in FY27 on steady demand, strong balance sheets: ICRA

Credit growth across Indian banks and non-banking financial companies (NBFCs) is expected to remain resilient in the current financial year, supported by steady retail demand, adequate liquidity and strong balance sheets, according to credit rating agency ICRA Limited.

Credit growth across Indian banks and non-banking financial companies (NBFCs) is expected to remain resilient in the current financial year, supported by steady retail demand, adequate liquidity and strong balance sheets, according to credit rating agency ICRA Limited. Speaking to ANI, Ashish Modani, Senior Vice President and Group Head - Financial Sector Ratings at ICRA Limited, said banks are likely to maintain stable profitability in 2026-27.

"On the margins front, the overall cost of funds benefits from surplus liquidity in the system, while yields are likely to benefit from the onset of the rate hike cycle," Modani said. He added that credit costs may rise slightly but are expected to remain under control.

"While the credit cost is expected to increase marginally, it would remain benign and much lower than historical levels. Thus, ICRA expects the profitability of banks to remain largely steady and comfortable in 2026-27." Addressing concerns over a slowdown in credit growth in the second half of FY2027, Modani said the moderation in reported figures is largely due to a high base effect and does not necessarily indicate weaker loan demand.

On asset quality, he said higher interest rates and inflation are not expected to immediately lead to a widespread deterioration, provided credit flows remain healthy. "ICRA does not forecast higher interest rates or inflation to translate immediately into a broad-based deterioration in headline asset quality, particularly as long as credit flows from banks to NBFCs, and onward to underlying borrowers, remain healthy. Nonetheless, some pressure in the softer delinquency buckets cannot be ruled out." Sachin Sachdeva, Vice President and Co-Group Head at ICRA Limited, said the temporary liquidity support provided through concessional FCNR(B) swaps has helped banks manage their funding requirements. However, this support is expected to diminish as the funds are deployed.

"Within a quarter, most of that liquidity gets deployed. So on a modelling basis, that cushion lasts through the latter part of this quarter. From next quarter onwards, banks will again start chasing deposits to ensure they have adequate resources for credit expansion," Sachdeva stated. Commenting on the credit growth outlook, he reiterated that the moderation in growth figures does not point to a significant slowdown in demand.

"A demand slowdown is not a major factor here... a large part of that moderation stems from a high base effect rather than a pullback in credit demand." On interest rates, Sachdeva said ICRA's baseline forecast points to a possible rate hike in December.

"As per the guidance from our economics team led by Aditi Nayar, our baseline projection is expecting a 25 bps rate hike in the month of December." Meanwhile, Deep Inder Singh, Vice President and Co-Group Head at ICRA Limited, highlighted the strategies adopted by housing finance companies (HFCs) to manage competition from commercial banks.

"To achieve growth, housing finance companies have increased their focus on the Loan Against Property (LAP) segment as well as commercial real estate," Singh said. He noted that the shift towards these lending segments is helping HFCs protect their net interest margins amid competition.

Singh also highlighted the strong growth in gold loans, driven mainly by rising gold prices and changing borrower preferences. "Growth has been primarily driven by the increase in gold prices... gold loans are evolving from a 'loan of last resort' to a 'loan of convenience.' We are expecting a 40 per cent growth in gold loan AUM for NBFCs in FY2027."

The outlook indicates that credit demand is expected to remain firm, although banks may need to step up deposit mobilisation as temporary liquidity support fades. (ANI)