Ind-Ra revises FY27 bank credit growth upward to 15%; provisioning for expected loss may hit profit

New Delhi: Domestic credit rating agency India Ratings on Thursday revised its FY27 bank credit growth estimate upward to 15 percent from earlier 13 percent, but flagged an impact on profitability as lenders set aside money for transitioning to the expected credit loss system of provisioning.

The upward review on the credit costs front is driven by expectations of a higher proportion of lending to corporates towards working capital requirements, especially on the back of benefits on cash reserve ratio (CRR) on the deposits raised from the diaspora, the agency said, adding that tighter bond yields will also make bank borrowings more attractive for non-banking finance companies (NBFCs).

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The revised projection on credit growth, however, is lower than the current 19.3 per cent year-on-year growth as of July 31.

However, from a profitability perspective, banks will face some challenges despite the higher credit growth and the proportion of dud assets being at all-time lows, it said.

Credit costs for banks are likely to rise to 0.74 per cent in FY27 from 0.65 per cent in the previous fiscal due to additional provisioning requirements under the Expected Credit Loss (ECL) framework.

Ankit Jain, associate director, India Ratings, said the transition to ECL norms is likely to weigh on the banking sector through a one-time impact on the balance sheet and higher steady-state credit costs, driven by increased Stage 1 and Stage 2 provisioning requirements.

Credit costs for the banking sector declined to 0.65 per cent in FY26 from 4.19 per cent in FY18, supported by a benign credit environment, corporate deleveraging in the post-COVID period, strong provisioning on legacy NPAs and improving risk management practices, India Ratings' FY27 Mid-Year Banking Outlook report said.

Consequently, system-wide return on assets (ROA) is projected to decline by 0.06 per cent year-on-year to 1.31 per cent in FY27, with public sector banks likely to face a greater impact than private banks due to lower provisioning buffers. However, some of the pressure may be offset by capital release from revised risk-weight asset requirements, the report said.

Deposit growth has consistently lagged credit growth by an average of about 3.80 per cent since FY22, pushing the loan-deposit ratio (LDR) to 84.8 per cent in the first quarter of FY27 from 71.7 per cent in FY22, India Ratings said.

While the elevated LDR has remained a structural concern over the past two years, RBI measures on FCNR(B) deposits are expected to attract additional deposits and help moderate LDRs, although only temporarily.

Factoring in FCNR(B) deposits, India Ratings now expects deposit growth of nearly 13.6 per cent year-on-year in FY27, compared with its earlier estimate of 11.4 per cent.

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Further, the report said NBFCs are likely to focus more on maintaining collection momentum and asset quality rather than portfolio growth amid multiple domestic and global headwinds, including an uneven and deficient monsoon, slower economic growth, a volatile global environment and rising inflation.

On the funding side, the report said NBFCs are likely to face margin pressure in FY27 due to volatile and elevated rates, with limited room to increase lending rates.

The TReDS (Trade Receivables Electronic Discounting System) platform could see a minimum 10-15 per cent growth over the next two-three years as government receivables also come onto the platform, Jatin Nanaware, senior director and head of structured finance, said.

Guarantee schemes could also help increase participation by giving buyers greater confidence to take receivables of lower-rated obligors onto their books. "When the guarantee schemes come, that will give some confidence to the buyer in that market to take those receivables also in their book, actually," he said.

Nanaware said some of these receivables could also eventually come into securitisation products, where credit enhancement or guarantees could help bundle lower-rated obligors.

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