Credit growth remained on an upward trajectory and picked up sharply towards the end of Q4 FY2026, supported by the shift in demand from the bonds market to banks as banks’ rates remained steady while bond yields stayed elevated and rose further in March 2026. Additionally, the shift in the reporting date to the 15th and month-end from alternate Fridays inflated the reported credit offtake in FY2026. Accordingly, incremental credit expansion was high in FY2026 at Rs. 29.2 trillion compared to Rs. 18.0 trillion in FY2025; on a comparable basis (March 2026 vs March 2025), it stood at Rs. 21.7 trillion in FY2026. ICRA expects growth to stay healthy with retail and micro, small and medium enterprises (MSMEs) as the key growth drivers along with credit demand from corporates shifting from bond markets to banks. In addition, the measures taken by the Reserve Bank of India (RBI) are likely to help banks raise sizeable foreign currency non-resident (FCNR) deposits, which will boost fund availability and help enhance credit growth. Accordingly, ICRA has revised its incremental credit estimate for FY2027 to Rs. 28.75-30.25 trillion (13.5-14.2% year-on-year; YoY) from the previous estimate of Rs. 23.50-25.00 trillion (11.3-12.0% YoY).

However, the ongoing West Asia conflict has introduced uncertainties, particularly for MSMEs, due to potential oil shocks, supply chain disruptions, and inflationary pressure. Moreover, the cost of funds is expected to stay high in this scenario, which would further keep the net interest margins (NIMs) under pressure. Prolonged disruptions may affect borrower cash flows as well, posing asset quality risks and additional pressure on profitability. ICRA also remains watchful of the MSME asset quality. Nevertheless, profitability is expected to remain comfortable in FY2027.