The recent GST rate cuts, aimed at boosting domestic demand and partly offsetting tariff pressures on exports, will support credit expansion for banks and NBFCs in the near term, analysts at Icra said on Wednesday. The rating agency expects incremental bank credit flow to rise to ₹19.0-20.5 lakh crore in 2025-26 (April–March), from ₹18 lakh crore in the current fiscal. This translates into year-on-year credit growth of 10.4-11.3% for banks in FY26 and 15-17% for non-bank financial companies (NBFCs). In FY25, bank credit grew 10.9%, while NBFCs reported 17% growth.
Icra’s data showed that incremental bank credit growth slowed to ₹3.9 lakh crore in April–August this year, compared with ₹5.1 lakh crore a year earlier, but remains at “satisfactory levels.” The agency maintained a stable outlook for banks and NBFCs, barring microfinance, where the outlook is negative, citing adequate capital buffers to absorb unforeseen losses.
Liquidity and Margin Outlook
Analysts noted that the gradual downward repricing of deposits, easing credit-to-deposit ratios and abundant liquidity in the system would also support credit growth.
While banks and NBFCs will not be directly hit by the 50% tariffs imposed by the US, indirect effects could emerge, Icra cautioned. “The second-order impact of the macro-trends on the borrower profile remains monitorable, which could be visible from Q3 of the current financial year in case growth remains tepid and the adverse impact of tariffs unfolds,” the agency said.
Borrower segments targeted by banks and NBFCs could be pressured by weak demand or income shocks. Employees of affected units may also face liquidity issues in servicing existing debt, such as microfinance, personal loans and home loans, the report warned. Lenders continue to face asset-quality risks amid uncertainties from evolving geopolitical conditions.
Despite these headwinds, lower funding costs should support margins and earnings for lenders. Anil Gupta, Senior Vice President and Co-Group Head at Icra, said fixed deposit rates have bottomed out and further cuts are unlikely if the RBI holds the repo rate. Net interest margins, under pressure in recent quarters, are also seen having bottomed out and may improve after Q2FY26.
Asset-Quality Concerns for Smaller Players
On asset quality, analysts flagged early signs of stress in SME loans—particularly those below ₹25 lakh—across both banks and NBFCs. Icra also highlighted stress in the micro-LAP segment.
Small and mid-sized NBFCs face heightened risks, the agency added, especially those with thin capital buffers and high borrower overdues. “These entities also have relatively limited financial flexibility in terms of refinancing or raising equity capital to absorb losses and may be prone to credit risk as the combined impact of the above-mentioned factors evolves,” the report said.
