Bank Credit Growth May Slow in FY27 Despite Strong Loan Demand
Despite strong demand from MSMEs and retail, bank credit growth in India may slow by FY27 due to liquidity and interest rates.
While the appetite for borrowing remains high across various sectors of the Indian economy, the overall bank credit growth FY27 may witness a moderation. According to a recent report by Anand Rathi, this potential slowdown comes despite healthy demand from retail customers, businesses, and micro, small and medium enterprises (MSMEs).
The Driving Forces Behind Current Growth
The report indicates that credit growth has not been limited to just one sector but has accelerated across multiple fronts. There is a clear shift as borrowing activity expands beyond simple retail lending toward business and investment-related sectors, signaling a broadening borrowing cycle in India.
Sector-Specific Performance
- Industrial Credit: Excluding infrastructure, this sector saw a year-on-year growth of 23.4 per cent, with significant contributions from the chemicals, jewellery, construction, and engineering industries.
- Services Sector: This sector has recorded its strongest credit growth within the current financial year.
- Personal and Agri Loans: Demand remains robust, with personal loans and agricultural credit growing by 19.5 per cent year-on-year.
- Infrastructure: Credit in this segment increased by 11.8 per cent.
Why Growth Might Moderate in FY27
Despite the current momentum, Anand Rathi suggests that the pace of growth is expected to ease. The report notes that the deceleration appears to be more statistical than a lack of demand. However, several headwinds could impact the trajectory for FY27:
Tightening Liquidity and Rates: The combination of a stretched base, shrinking liquidity within the banking system, and the October rate hike is expected to weigh on loan growth. Additionally, tighter interest rates could lead to a modest increase in fresh slippages.
Shift in Corporate Funding: Interestingly, the report expects corporations to lean more heavily on bank funding. This shift is driven by rising bond yields, which are making market borrowing a less attractive option for large companies.
The Liquidity Rollercoaster
The banking system's liquidity has seen significant fluctuations. In early September 2026, surplus liquidity hit a record high of approximately Rs 11 lakh crore, bolstered by rupee liquidity injections tied to FCNR(B) deposits.
To manage this, the Reserve Bank of India (RBI) stepped in to absorb the excess through Open Market Operation (OMO) sales and Variable Rate Reverse Repo (VRRR) auctions. The central bank's goal has been to maintain tighter liquidity to support the stability of the rupee.
By late October, liquidity moved toward a neutral position, pressured by tax outflows and the surge in cash demand typically seen during the festive season. While conditions are expected to remain tight, the report suggests that upcoming government spending might offer some relief to the system.
Lending and Deposit Trends
The report also touched upon the lending-deposit spread, which widened slightly to 2.4 per cent in August 2026. This happened as both deposit and lending rates experienced a decline:
- Weighted Average Lending Rate: Fell to 8.96 per cent on outstanding loans.
- Outstanding Deposit Rates: Decreased to 6.56 per cent.