GST Rate Cuts Expected to Boost Credit Growth for Banks and NBFCs: ICRA

New Delhi: A new report by rating agency ICRA projects stronger credit growth for banks and non-banking financial companies (NBFCs) in FY2026, supported by GST rate cuts, an upcoming CRR reduction, and abundant liquidity in the system.

According to the report, incremental credit flow for banks is expected to rise to ?19–20.5 lakh crore in FY2026, compared to ?18 lakh crore in FY2025. This represents a year-on-year growth of 10.4–11.3%, slightly higher than the 10.9% growth recorded last year.

For NBFCs (excluding infrastructure-focused entities), credit growth is projected at 15–17% in FY2026, compared to 17% in FY2025.

Credit Growth Drivers

Although incremental bank credit growth was lower in the first five months of FY2026 (?3.9 lakh crore) versus the same period last year (?5.1 lakh crore), GST rationalisation and policy support are expected to spur lending in the coming months.

ICRA also notes that the downward repricing of deposits will improve banks’ competitiveness against debt capital markets, while the credit-to-deposit ratio and strong liquidity will provide further tailwinds for lending expansion.

Asset Quality and Risks

ICRA Senior Vice President Anil Gupta highlighted that stress in retail and MSME loan segments had slowed growth for both private banks and NBFCs. However, he added:
"With improvement in economic activity post-GST rate cuts, the growth appetite shall improve, which will support credit growth."

Despite the positive outlook, the report flagged ongoing loan quality risks tied to global uncertainties and evolving geopolitical conditions.

As of July 2025, loans to MSMEs and unsecured personal loans accounted for 17% of the total non-food bank credit of ?184 lakh crore. For NBFCs, loans to small businesses and unsecured personal/consumption loans made up about 34% of total credit of ?35 lakh crore as of March 2025.

ICRA cautioned that while macroeconomic shifts may not directly hit lenders, they could indirectly affect borrowers in export-linked or demand-sensitive sectors. For instance, transport operators in the apparel export sector may face underutilisation, while employees in such industries could struggle to service existing loans (microfinance, personal, or home loans) due to income shocks.

Outlook

Despite these headwinds, the falling cost of funds is expected to support margins and profitability. ICRA maintains a stable outlook for banks and NBFCs, with the exception of the microfinance sector, where the outlook remains negative. Current capital buffers, the report notes, are sufficient to absorb unforeseen shocks.

With inputs from IANS