Bank credit growth may moderate in FY27 despite borrowing demand

New Delhi: India's bank credit growth may moderate in FY27 despite healthy borrowing demand from retail customers, micro, small and medium enterprises (MSMEs) and businesses, as higher interest rates, a stretched base and tightening liquidity are expected to slow fresh loan demand, according to a report by Anand Rathi.

The report said credit growth has accelerated across several sectors, indicating that borrowing activity is expanding beyond retail lending towards businesses and investment-related sectors. However, the pace of growth is expected to ease in the current financial year.

"The deceleration looks more statistical than demand-led, though tighter rates may lead to a modest uptick in fresh slippages," the report said.

Industrial credit, excluding infrastructure, grew 23.4 per cent year-on-year, led by engineering, construction, jewellery and chemicals. Infrastructure credit increased 11.8 per cent, while the services sector recorded its strongest credit growth this financial year.

Personal loans and agricultural credit also remained robust, growing 19.5 per cent year-on-year.

According to the report, the broad-based increase in credit indicates that India's borrowing cycle is gradually expanding beyond retail lending, with businesses and investment-related activities contributing to demand.

Robust retail and MSME borrowing are expected to support near-term credit growth. The report also expects corporates to increasingly turn towards bank funding as rising bond yields make market borrowing less attractive.

However, the October rate hike, a stretched base and shrinking banking system liquidity could affect loan growth in FY27.

The report also highlighted changes in banking system liquidity. Surplus liquidity reached a record around Rs 11 lakh crore in early September 2026, supported by rupee liquidity injections linked to FCNR(B) deposits.

The Reserve Bank of India subsequently absorbed surplus liquidity through Variable Rate Reverse Repo (VRRR) auctions and Open Market Operation (OMO) sales. The central bank has since maintained tighter liquidity conditions to support the rupee.

Festive cash demand and tax outflows pushed banking system liquidity close to neutral by late October. The report expects liquidity conditions to remain tight, although government spending in the coming months could provide some relief.

Meanwhile, the lending-deposit spread widened marginally to 2.4 per cent in August 2026, as lending and deposit rates eased. The weighted average lending rate on outstanding loans declined to 8.96 per cent, while outstanding deposit rates fell to 6.56 per cent.