ICRA: Bank Credit Growth To Slip Below 12% In FY27 Amid West Asia War

India's banks are heading into a slower year. Investment Information and Credit Rating Agency of India Limited (ICRA) expects credit growth to come in at 11.0-11.7% in FY27, a step down from the 15.9% recorded in FY26, as the West Asia conflict, higher oil prices and deposit-side pressures combine to put the brakes on lending.

Total credit outstanding is projected to reach ₹236.4-237.9 trillion by the end of FY27, with new credit expansion estimated at ₹23.5-25.0 trillion through the year. The slowdown is real, but ICRA is not calling it a crisis. Growth would still come in above the 10.9% posted in FY25, and the agency has maintained a stable outlook on the sector.

Projections At A Glance

• Credit growth FY27: 11.0-11.7%, down from 15.9% in FY26.

• Credit expansion: ₹23.5-25.0 trillion.

• Gross non-performing asset (NPA): 2.0-2.1% in FY27.

• Return on assets: 1.2-1.3%.

• Return on equity: 12.3-13.2%.

• Gross domestic product (GDP) growth estimate: 6.5%, assuming crude at $85 per barrel.

The West Asian Problem

The conflict in West Asia is the central variable in ICRA's outlook. The Strait of Hormuz disruption has raised risks for India's trade and energy supply chains, and West Asia accounts for somewhere between 14% and 20% of India's total trade. If oil prices stay elevated, the current account deficit widens, inflation picks up, and consumer spending takes a hit.

The Ministry of Micro, Small & Medium Enterprises (MSMEs) sit at the sharp end of this risk. Supply chain disruptions tend to hit smaller businesses hardest, and ICRA flagged this segment specifically as one where banks are likely to pull back.

Sachin Sachdeva, Vice President and Sector Head at ICRA, said the sharp FY26 expansion is giving way to a more measured pace as global uncertainties and higher crude prices start feeding through into macroeconomic and financial conditions.

Margins And Deposits

Net interest margins are under pressure and are likely to stay that way for much of the year. Deposit growth lagged credit through most of FY26, and competition for deposits at finer rates has kept costs sticky. The cost of deposits is not expected to fall materially in the near term, which keeps margin relief limited.

Banks also drew down surplus liquidity and excess statutory liquidity ratio (SLR) holdings through FY26 to keep credit flowing. That leaves them with thinner buffers heading into FY27, making deposit mobilisation at competitive rates more important than it has been in some time.

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Asset Quality

The rating agency says the asset quality picture is manageable but not entirely clean. ICRA expects slippages to tick up, particularly in unsecured retail and MSME books where private sector banks carry the most exposure. Gross NPAs are projected to stay in the 2.0-2.1% range, and credit costs are expected to rise, though not by enough to materially dent profitability.

Sources:

ICRA

CNBC TV18

Moneycontrol