S&P Sees India’s Bank Credit Growth Rising to 11.5% by March; Expects Asset Quality to Weaken

Credit growth in India’s banking sector is expected to accelerate in the second half of the current financial year, driven by goods and services tax rationalisation, income tax relief, and potential regulatory easing, S&P Global Ratings said Wednesday.

The rating agency projects credit growth to rise to 11.5% by March, from 11.0% at the end of 2024-25, and to 12.5% by 2026-27–2027-28, according to its latest report.

“Notwithstanding global uncertainty and cautious lending, we forecast credit growth of 11.5–12.5% over 2025-26 and 2026-27,” S&P said. “Indian banks are well-positioned to navigate global uncertainty, tariffs, rate cuts, and a weakening rupee.”

S&P said the outlook for banks remains supported by low exposure to tariff-hit sectors, corporate deleveraging, and a focus on secured retail loans. However, it expects asset quality to weaken, with credit costs rising to 80–90 bps over the next two years as recoveries ease and stress builds in unsecured retail, SME loans under ₹1 mln, and microfinance segments.

New non-performing asset formation in corporate lending is projected at 1.1% annually, while overall NPA formation could be higher at 1.7–1.8%, led by SME and retail slippages.

A sharp revival in credit growth, though unlikely in the next two years, could strain banks’ funding profiles and push them toward alternative funding, S&P said. “Cuts to the cash reserve ratio offer relief,” said S&P Credit Analyst Geeta Chugh, adding that earnings are likely to moderate but remain above long-term averages.

S&P also cautioned that banks’ ability to fund private investment could be limited as savings shift toward mutual funds, equities, and real estate, forcing banks to increasingly depend on wholesale and international debt for funding.