With India’s real GDP growth expected to grow at a slower clip of 6.5 per cent in FY27 against an estimated 7.5 per cent for FY26, ICRA sees bank credit moderating and slippage rate rising in the current financial year amid heightened geopolitical uncertainties and evolving interest rate dynamics.
The rating agency expects credit growth to moderate to sub-12 per cent in FY27 (at 11.0-11.7 per cent, surpassing the growth rate of 10.9 per cent in FY25) from the significantly higher level of 15.9 per cent in FY26.
Sachin Sachdeva, Vice President & Sector Head, said: “ICRA expects bank credit growth to ease in 2026-27 following the sharp expansion in 2025-26 as the impact of elevated global uncertainties, including the West Asia war, and higher crude oil prices begin to reflect in macroeconomic and financial conditions.”
Banks to be cautious about MSMEs
“Vulnerable sectors like micro, small and medium enterprises (MSMEs) are likely to bear the brunt of supply chain disruptions. This could make banks cautious in lending to this segment, which was one of the key growth drivers in the recent past.”
Overall, ICRA has maintained a Stable outlook on the Indian banking sector for FY27, underpinned by comfortable capitalisation, manageable asset quality risks and steady profitability, even as growth moderates from recent highs amid the complex global macroeconomic environment, leading to pressure on the asset quality.
The agency opined that deposit mobilisation at finer rates remains a key challenge. Going forward, the cost of deposits is not expected to decrease materially, keeping net interest margins (NIMs) under pressure.
ICRA noted that banks had drawn down surplus liquidity buffers in 2025-26, including reduction in excess statutory liquidity ratio (SLR) holdings, to support credit growth, resulting in some decline in the liquidity coverage ratio (LCR) buffers. Thus, their ability to raise deposits at better rates would be important for sustainable credit growth and adequate profitability.
Going forward, the agency expects the ongoing geopolitical uncertainties to cast a shadow over MSMEs and unsecured retail loans, which would push up the slippage rate, leading to a slight increase in gross non-performing advances (GNPAs). Nonetheless, GNPAs would stay benign at 2.0-2.1 per cent in 2026-27.
Sachdeva observed that while private sector banks continue to report higher slippage rates than public sector banks owing to their greater exposure to unsecured retail and MSME portfolios, the overall asset quality is projected to remain manageable.
Credit costs to rise
ICRA expects the incremental provisioning requirement to increase to some extent and the overall credit costs to rise, though the impact is not likely to be material. Nonetheless, if the conflict-induced pressure persists for a longer period, the slippage rate may rise further.
As per the agency’s estimate, every 50 basis points (bps) increase in the fresh NPA (non-performing asset) generation rate reduces the return on average assets (RoA) by 9-10 bps and the return on equity (RoE) by 95-100 bps.
The agency expects bank profitability to decline slightly but remain healthy in 2026-27, supported by moderate operating expenses and rising but manageable credit costs.
Some pressure on margins may persist in the near term due to competition for deposits, although this is likely to ease towards the later part of 2026-27, it added.
The agency expects the RoA and RoE at 1.2-1.3 per cent and 12.3-13.2 per cent, respectively, in 2026-27 though this would remain sufficient to fund the sector’s credit growth.
Published on April 22, 2026