Mumbai: Measures taken by the Reserve Bank of India (RBI) to ease the monetary policy in recent months are expected to support a year-on-year credit expansion of around 10.8 per cent at Rs 19 lakh crore to Rs 20.5 lakh crore in 2025-2026, according to an ICRA report released on Tuesday.
Such measures include the repo rate cut, deferment of proposed changes in the liquidity coverage ratio (LCR) framework and additional provisions on infra projects, along with the roll-back of increased risk weights on lending to unsecured consumer credit and non-banking financial companies (NBFCs).
Besides this, the durable liquidity infusion by the RBI through open market operations (OMO) by way of purchases of Government bonds and forex swaps with banks, would aid the liquidity and faster transmission of the ongoing cut in policy rates, the report states.
However, the persisting challenges in deposit mobilisation, high credit-deposit (CD) ratio and rising stress in the unsecured retail and small business loans would remain a drag on credit growth, and accordingly, the pace of credit expansion is expected to trail the recent highs seen in FY2024, the report further states.
“The pro-growth regulatory stance has revived the lenders’ appetite for credit growth in Q4 FY2025 after a brief period of slow incremental credit growth in the initial period of FY2025,” it said.
The recent announcements of liquidity injections by the RBI are likely intended to nudge a faster transmission of rate cuts. One of the key challenges, which the banking sector has been facing in the last few years is raising deposits at competitive pricing, especially retail deposits, given the pressure on the LCR.
The increasing competition from other investment avenues and the investors’ preference for term deposits have led to a reduction in the share of low-cost current and savings account (CASA) balances, impacting the banks’ cost of funds.
The challenges are likely to persist in the near term, which is likely to delay the transmission of rate cuts by the RBI to banks’ cost of funds, in spite of the recent liquidity measures, thereby impacting the banks’ margins, according to the report.
In addition, with the elevated CD ratio, the banking sector’s reliance on wholesale deposits has increased, leading to a steady decline in the average LCR of the sector.
ICRA Vice President Sachin Sachdeva said: “With an elevated CD ratio, the competition for deposit mobilisation is likely to remain high even during FY2026, which will limit the banks’ ability to cut their deposit rates. The lending rates may, however, remain under pressure because of the decline in the external benchmark-linked loans and competition from debt capital markets. With expectations of a cumulative 75 basis points (bps) cut in repo rates from February 2025 onwards, we expect the net interest margins (NIMs) for the banks to decline by 15-17 bps during FY2026.”
“Though ICRA expects the profitability to trend downwards in FY2026 with the return on assets (ROA) and return on equity (RoE) at 1.1-1.2 per cent and 12.1-13.4 per cent in FY2026 respectively, the same are estimated to remain comfortable for the projected growth without a significant reliance of fresh capital requirements, leading to ICRA’s Stable outlook for the sector,” he added.