India Ratings Raises FY27 Bank Credit Growth Forecast To 15%

India Ratings has raised its FY27 bank credit growth forecast to 15%, up from an earlier estimate of 13%. The agency attributes this upward revision to expectations of a higher proportion of lending to corporates for working capital needs, particularly due to benefits on cash reserve ratio (CRR) on deposits raised from the diaspora. Additionally, tighter bond yields are making bank borrowings more attractive for non-banking finance companies (NBFCs).

However, the transition to the Expected Credit Loss (ECL) framework is expected to increase credit costs for banks by about 0.09 percentage points in FY27, from 0.65% in the previous fiscal. This one-time impact stems from increased Stage 1 and Stage 2 provisioning requirements under ECL. Consequently, system-wide return on assets (ROA) is projected to decline by 0.06 percentage points year-on-year to 1.31% in FY27, with public sector banks likely to bear a larger burden due to lower provisioning buffers.

While deposit growth has lagged credit growth in recent years, the RBI's measures on FCNR(B) deposits are expected to attract additional deposits, moderating the loan-deposit ratio (LDR) temporarily. The agency now anticipates deposit growth of approximately 13.6% year-on-year in FY27, up from its previous estimate of 11.4%.

Looking ahead, NBFCs are anticipated to prioritize maintaining collection momentum and asset quality over portfolio growth amidst multiple domestic and global challenges, including an uneven monsoon, slower economic growth, volatile global environment, and rising inflation. NBFCs may face margin pressure in FY27 due to volatile and elevated rates, with limited capacity to increase lending rates.