Why India’s bank credit growth may slow in FY28

Despite the war in West Asia, surging crude prices, and rising interest rates, the banking sector is expected to see strong credit growth in the current financial year. However, the growth rate in financial year 2028 could be slightly lower than projected for this year, according to officials at credit rating agency ICRA.

So far, the Reserve Bank of India (RBI) has raised its benchmark repo rate by 25 basis points. Going ahead, if there are more hikes and if the gap between bond yields and the bank rates narrows, then corporates may again shift back to the bond market, according to Sachin Sachdeva, Vice President and Co-Group Head, Financial Sector Ratings, ICRA.

"Domestically, rate hikes will be there. The narrowing of the gap between bond yields and bank rates will be a second aspect. And third would be that after having grown at such a healthy pace, the base effect also kicks in. If you have around Rs 33 lakh crore of credit growth this year, every year you won't be having that much, in terms of absolute number," Sachdeva pointed out.

Banks have so far seen robust credit growth, which touched 21.4% till the July-September quarter. This growth was led by higher working capital demand among corporates, and elevated bond yields also made bank funding more attractive.

But that growth is expected to normalise in the second half, with ICRA projecting around 15.5% credit growth for the full year ending March 2027.

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It expects banks’ incremental credit flow to rise to Rs. 32.3-33.8 lakh crore in 2026-27 from Rs. 29.2 lakh crore in 2025-26.

Apart from corporate credit, retail and micro, small and medium enterprises (MSMEs) are also aiding credit growth.

Additionally, sizeable foreign currency non-resident (FCNR (B)) inflows during the RBI’s concessional swap window led to surplus liquidity in the banking sector, which ICRA officials say provides headroom for credit growth. The FCNR (B) fund raises also reduced banks' dependence on expensive wholesale deposits, thus keeping funding costs in control.

Meanwhile, ICRA expects banks’ profitability to remain largely steady and comfortable 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. While the credit cost is expected to increase marginally, it would remain benign and much lower than the historical levels," said Ashish Modani, Senior Vice President and Group Head, Financial Sector Ratings, at ICRA.