Domestic ratings agency ICRA in its latest report has said India’s banking sector is likely to see a moderation in credit growth in this financial year (FY27) largely due to ongoing conflict in West Asia and changing interest rate dynamics. It has projected bank credit growth to ease to below 12 per cent in FY27, down from 15.6 per cent achieved in FY26.

According to the report, rising geopolitical uncertainties would lead to an uptick in slippages from the small businesses and unsecured loan exposures. It noted that credit growth will moderate to 11-11.7 per cent, which will involve an expansion of up to Rs 25 lakh crore to take the overall outstanding credit to around Rs 237 lakh crore at the end of March 2027. It said that ‘deposit growth continued to lag the credit growth in FY26, but we saw some pickup towards the end of the fiscal year as banks started pushing to raise funds.’ It said the deposit mobilisation at finer rates remains a key challenge and noted that net interest margins will continue to be under pressure as the cost of deposits is not expected to decrease materially.

ICRA said banks' ability to raise deposits at better rates would be important for sustainable credit growth and adequate profitability, reminding that lenders have opted to draw down on surplus liquidity buffers in FY26, like reducing the excess statutory liquidity ratio (SLR) holdings to support credit growth. Going forward, it expects the ongoing geopolitical uncertainties to cast a shadow over MSMEs and unsecured retail loans, which would push up the slippage rate, leading to a slight increase in gross non-performing advances (GNPAs). Nonetheless, GNPAs would stay benign at 2.0-2.1 per cent in FY27. Overall, ICRA has maintained a stable outlook on the banking sector, citing adequate capitalisation, manageable asset quality risks, and steady profitability, despite a more complex global macroeconomic environment.