Bank credit is set to grow at 13 per cent in FY27, driven by healthy growth in the micro, small and medium enterprise (MSME) and retail sectors, as well as the continued preference of corporates for bank credit rather than issuance of bonds amid the prevailing interest rate differential, Crisil Ratings said in its report. Overall, credit growth is expected to be a tad slower than the estimate of 14 per cent for FY26.
Tailwinds from the regulatory and government measures announced in fiscal 2026 should sustain and support growth; however, the extent of benefit will taper over time and the impact will be seen across sub-segments — corporate, MSME and retail. The duration and intensity of the West Asia conflict and its effect on the macroeconomic landscape can also impact the credit growth calculus. Further, a pick-up in deposit growth will be crucial, given the recent widening of its gap with credit growth.
Subha Sri Narayanan, director, Crisil Ratings, said, “Credit growth in the corporate sector (₹36 per cent of domestic bank credit) is seen growing 9-10 per cent, in line with ₹10 per cent in fiscal 2026. After a subdued start, corporate credit growth accelerated in the second half of fiscal 2026, supported by lower interest rates on bank loans relative to corporate bonds.”
Corporate bond yields began dropping in January 2025; the trend reversed after July, and by March 2026, yields rose past the January 2025 level. Meanwhile, the weighted average lending rate (WALR) of banks dropped almost 90 basis points (bps) between January 2025 and March 2026. This has resulted in corporates, mainly in large sub-segments such as non-banking financial companies (NBFCs), preferring bank credit. The trend of corporate bond interest rates being higher than bank WALRs should continue in fiscal 2027 as well, which will aid demand for bank credit.
Newer options such as acquisition financing, now allowed for banks by the RBI, should also support credit growth. The ongoing West Asia conflict would have a dual impact on wholesale credit growth. On one hand, associated uncertainties could weigh on a broad-based revival in private sector capex. On the other hand, supply chain disruptions and higher input prices would increase demand for working capital debt in the short term.
The latter would especially play out in the MSME segment (₹19 per cent of domestic bank credit). Although it will still remain the fastest-growing portfolio for the banking sector, growth may moderate from the 24-25 per cent level seen in FY2026 as the country’s economic growth tempers.
Growth in FY2027 should still be upwards of 22 per cent in the base case for two reasons. One, government initiatives such as the three-tier stimulus for MSMEs announced in the Union Budget and doubling of collateral-free loan limits should enhance funding access, liquidity, and transaction settlement for MSMEs. Further, strengthening the operational infrastructure and digital ecosystem associated with MSMEs is enabling better data access, which, in turn, enhances the ability of banks to assess risk and cater to this segment.
Nevertheless, heightened caution by banks in lending to export-oriented MSMEs focused on West Asia, or those dependent on crude oil/liquefied natural gas (LNG), could temper growth in the near term.
Retail loans (₹33 per cent of bank lending) will continue to grow at a reasonable clip, at ₹14 per cent, in fiscal 2027. While this will be lower than the second half of fiscal 2026, which benefitted from the immediate impact of regulatory stimuli such as softer interest rates and tax relief, it will be only a marginal moderation compared with fiscal 2026 overall.
Banks continue to be well-positioned in home loans, their largest business segment. They will continue to gain share in the prime segment given competitive pricing.
Growth in auto loans, which also hastened after the rationalisation of the goods and services tax (GST) last fiscal year, is expected to continue. Unsecured loans could see moderately higher growth in fiscal 2027 as the asset quality of newer originations has improved. However, inflationary pressures from a prolonged West Asia conflict and the resultant higher interest rates could weigh on retail consumption demand.
“Agricultural credit growth is expected to be range-bound at 10-11 per cent in fiscal 2027, with the expectation of normal monsoons,” the Crisil report said.
All said, deposit growth, a crucial support for credit growth, bears watching. The gap between credit growth and deposit growth, which had been eliminated in the first quarter of fiscal 2026, has again been widening with accelerating credit growth, standing at 300 bps as on March 15, 2026.
Vani Ojasvi, associate director, Crisil Ratings, said, “Regulatory measures such as the phased reduction in the cash reserve ratio have released liquidity for banks, providing support during the recent muted deposit growth. Banks are also utilising their excess statutory liquidity ratio buffers and tapping certificates of deposit (CDs) to fund credit growth. Notably, against overall deposit growth of 10.8 per cent year-on-year as on March 15, 2026, growth in CDs was ₹27 per cent, albeit on a much smaller base. However, this comes at a higher cost.”
Further, reducing levels of excess SLR will constrain the flexibility of banks. Going forward, making deposit growth is even more crucial.
“In this environment, competition for deposits will remain high, keeping deposit rates elevated. As a result, banks could increasingly turn to alternative funding avenues such as bonds and securitisation,” the report said.
While the base case sees bank credit growth remain relatively steady in fiscal 2027, the ongoing geopolitical uncertainties bear watching as they pose downside risks to India’s economic growth and could impact bank credit growth.
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