Moody's sees room for higher bank credit growth after LCR relief, but sticks to 11–13% forecast

Banking

Rating firm Moody’s is maintaining its loan growth projection for Indian banks at 11–13 percent for FY26, despite the Reserve Bank of India’s recent relaxation of Liquidity Coverage Ratio (LCR) guidelines.

Alka Anbarasu, Associate Managing Director, Financial Institutions Group, Moody’s Ratings, told Moneycontrol on the sidelines of a media briefing that the projections, initially set before the LCR guidelines were finalised, are split between public sector banks, which are expected to grow at single-digit to low-teen levels, and private banks, which are anticipated to see faster growth.

The revised LCR guidelines are expected to free up liquidity for banks, potentially boosting credit growth, she said.

“We expect the relaxation in LCR guidelines to add some capacity, potentially boosting loan growth by 100 to 150 basis points. While this is not a game-changer for loan demand, it does provide banks with more room to accommodate credit growth without needing to raise additional capital,” she said.

The guidelines

The final LCR guidelines, unveiled by the Reserve Bank of India on April 21, require banks to maintain a buffer of high-quality liquid assets to meet short-term obligations during financial stress. The revision is set to ease liquidity constraints and support credit growth.

Last year, Moody’s estimated that tighter LCR norms, particularly around internet-based deposits, could reduce banks' LCR by approximately 15 percentage points, forcing them to accelerate deposit growth to maintain lending capacity. However, “the relaxed guidelines are now projected to shave off only half that amount, easing the pressure on banks’ liquidity buffers,” Anbarasu said.

The analyst noted that the final LCR guidelines are significantly less stringent than the draft, which could technically allow the banking system to support much higher credit growth than currently projected.

“Some of these relaxations could definitely play a role in supporting growth beyond our current estimates,” she added.

Despite the potential for higher growth, Moody’s is sticking to its conservative projections for now, which are 11 percent for banks and 16 percent for retail NBFCs.