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India’s banking sector is projected to witness a year-on-year credit expansion of ₹19 lakh crore to ₹20.5 lakh crore in FY2025-26, amounting to a growth of approximately 10.8%, according to a report by ICRA, a leading credit rating agency. This expansion is expected to be driven by recent monetary easing measures implemented by the Reserve Bank of India (RBI), though structural challenges in deposit mobilisation and rising credit-deposit ratios may temper growth momentum. According to ICRA, the repo rate cut, along with deferral of changes to the Liquidity Coverage Ratio (LCR) and easing of additional provisions for infrastructure lending, has revived lender confidence. In addition, the rollback of increased risk weights for unsecured consumer lending and non-banking financial companies (NBFCs) has created favorable conditions for credit growth, especially in the second half of FY2025.

The RBI’s liquidity infusions through Open Market Operations (OMOs), including government bond purchases and forex swaps, are also aiding transmission of rate cuts to the broader economy. These actions have infused durable liquidity into the system, enhancing credit availability and enabling a more effective reduction in lending rates over time. Despite these positive developments, the banking sector continues to face headwinds, particularly in the areas of deposit mobilisation, a high credit-deposit (CD) ratio, and growing stress in unsecured retail and small business loans. These factors are expected to slow the pace of credit growth compared to FY2024, which saw exceptionally high lending activity.

The ICRA report states, “The pro-growth regulatory stance has revived the lenders’ appetite for credit growth in Q4 FY2025 after a brief slowdown during the early part of the fiscal year.” However, the report also warns that challenges in retail deposit mobilization, especially with regard to current and savings account (CASA) balances, may reduce banks’ ability to lower deposit rates even in the face of easing monetary policy. One key issue flagged is the declining share of low-cost CASA deposits, caused by rising investor preference for fixed-term deposits and competition from other investment options. This shift is increasing the cost of funds for banks, and despite recent liquidity measures, may result in a slower transmission of RBI rate cuts into actual borrowing costs for consumers and businesses.

The elevated CD ratio is also forcing banks to increasingly rely on wholesale deposits, leading to a steady decline in the average LCR across the sector. The report notes that reduced LCR buffers could pose risks if liquidity tightens again in the near term. ICRA Vice President Sachin Sachdeva emphasized that banks will continue to face intense competition for deposits throughout FY2026. “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,” he said. “The lending rates may, however, remain under pressure because of the decline in the external benchmark-linked loans and competition from debt capital markets.”

ICRA anticipates a cumulative 75 basis points (bps) cut in repo rates beginning February 2025, which is expected to reduce banks’ Net Interest Margins (NIMs) by 15–17 bps in FY2026. This will have a direct impact on bank profitability, although the sector outlook remains stable. The report projects Return on Assets (ROA) and Return on Equity (RoE) for FY2026 to hover between 1.1%–1.2% and 12.1%–13.4%, respectively. While these represent a slight downward trend from FY2024, ICRA believes that banks will not require significant additional capital to support growth under the current trajectory. In summary, the RBI’s accommodative stance, combined with strategic liquidity support and regulatory easing, is creating an environment conducive to credit expansion. However, persistent systemic constraints, particularly around deposits and margin pressure, will continue to challenge the pace of growth. The coming fiscal year will thus be marked by a balance between opportunity and caution, as India’s banking sector navigates the complex interplay of monetary policy, financial stability, and economic recovery.