Credit growth unlikely to improve till H2 FY26 despite 100 bps repo rate cut

Bank credit

Uncertainties on the tariff war front, the absence of broad-based domestic demand and a stagnation in spending propensity of the urban middle class may delay a pickup in bank credit growth to the second half of the current fiscal (H2FY26), say experts. This is despite the Reserve Bank of India (RBI) over time cutting its policy rate by 100 basis points (bps) and lowering the cash reserve ratio (CRR) by 50 bps.

Bankers, analysts and industry experts who spoke to Moneycontrol said they are betting heavily on the festival season, beginning September-October this year, to see a noteworthy pick up in demand for loans. Given that the reductions in CRR will also be implemented in a phased manner starting from September this year, it also gives lenders cushion to draw a fine balance between liquidity and growth.

The timing of the CRR cut is crucial because between September and November, India will celebrate Ganesh Chaturthi, Diwali, etc., which may lead to a situation of heightened use of currency resulting in a subsequent drain on the banking system in terms of systemic liquidity. This period is also marked by an elevated demand for retail loans.

The CRR cut is scheduled in four tranches of 25 bps each starting from the fortnight beginning September 6, followed by October 4, November 1 and November 29, 2025.

That said, traditionally the domestic credit cycle has also been skewed with demand for credit historically higher in the second half of the fiscal.

Sachin Sachdeva, vice president and sector head, financial sector ratings, ICRA, sees moderate credit growth in H1FY26. The phased liquidity release from the CRR cut would start from September and, hence, would help in credit pickup in H2FY26.

“The persisting asset quality stress in the retail segment and the likely impact of geopolitical and macro developments on asset quality would keep lenders cautious, thereby slowing credit growth. In addition, deposit mobilisation remains challenging, especially given the declining interest rates, and the same would impact credit growth to some extent,” Sachdeva said.

Banks’ credit growth slowed sharply to a three-year low in FY25 due to international conflicts, trade-related uncertainties and cautious lending practices by banks. According to RBI data, banks’ credit growth stood at 8.97 percent in the year to May 31, 2025, compared to 19.78 percent in the previous financial year.

“Relentless headwinds, ranging from heightened geopolitical tensions to the unpredictable trajectory of US tariffs, continue to weigh heavily on capex decisions and subsequently wholesale credit demand. In addition, strong corporate cash flows have not only reduced the need for fresh working capital loans but have also enabled companies to repay existing debt. In essence, net wholesale credit growth remains subdued,” said Soumyajit Niyogi, director at India Ratings & Research.

Another factor weighing significantly on bank credit growth is the pullback in personal loans, including credit cards, a trend that has been particularly pronounced in the last 8-12 months.

Personal loans were largely consumption-oriented and helped maintain buoyancy in the credit market. The clampdown on such loans since November 2023, more so with small-ticket unsecured credit which was consumed abundantly by the urban lower middle class, has constricted credit demand and consumption. The strictures placed on microfinance loans is also said to have hurt consumption, particularly in the rural and semi-urban markets.

As per RBI data, bank credit towards personal loan showed a growth of 11.9 percent between April 19, 2024, and April 18, 2025, compared to 26.7 percent between April 21, 2023, and April 19, 2024.

The number of active microfinance loans declined from 16.1 crore in March 2024 to 14.0 crore in March 2025. Borrowers with five or more lender associations now constitute only 4.9 percent of the total book, down from 9.7 percent a year ago, as per CRIF High Mark data.

Equirus Securities in a report said that the microfinance sector has pegged FY26 loan growth at 10-15 percent.

On the whole, analysts believe that credit growth will be 10-11 percent in FY26. ICRA estimates credit expansion of Rs 19.0–20.5 lakh crore in FY26 (annual growth of 10.4–11.3 percent), slightly higher than FY25’s Rs 18.0 lakh crore (10.9 percent growth).