Will the GST Rate Cut Stimulate Credit Growth for Banks and NBFCs?

New Delhi, Sep 10 (NationPress) The anticipated incremental credit flow for banks is projected to rise to Rs.19-20.5 lakh crore in FY2026, up from Rs.18 lakh crore in FY2025. This signifies a year-on-year (YoY) growth of 10.4-11.3 percent for banks in the current financial year, a slight decline from 10.9 percent in FY2025, as per an ICRA report published on Wednesday.

The NBFC credit (excluding infrastructure-focused entities) is forecasted to grow at 15-17 percent this fiscal, down from 17 percent in FY2025, according to the report.

Despite a lower pace of incremental bank credit growth, which stood at Rs.3.9 lakh crore for the first five months of FY2026 compared to Rs.5.1 lakh crore in the same period last year, the GST rate cuts aimed at enhancing domestic demand are expected to bolster credit expansion for both banks and NBFCs in the short term.

With the anticipated CRR cut and GST rationalization, ICRA expects credit growth to reach the upper end of its estimated range of 10.4-11.3 percent for banks and 15-17 percent for NBFCs.

Moreover, the gradual decrease in the deposit base is likely to enhance the competitive positioning of banks against debt capital markets for the remainder of the year.

Additionally, the easing credit-to-deposit ratio and abundant liquidity in the banking system are expected to support credit growth, as noted in the report.

ICRA’s senior vice president, Anil Gupta, stated, “The stress in asset quality within retail and MSME segments has resulted in slower growth for private sector banks and NBFCs. An improvement in economic activity post GST rate cuts will likely enhance the growth appetite, supporting credit growth.”

However, the ICRA report also highlights that lenders have been facing loan quality risks and are vulnerable to uncertainties stemming from evolving geopolitical conditions.

Loans to MSMEs and unsecured personal loans constituted 17 percent of the overall non-food credit of Rs.184 lakh crore for banks as of July 2025.

Loans to small businesses, unsecured personal, and consumption loans account for approximately 34 percent of the total NBFC credit of Rs.35 lakh crore as of March 2025.

While the evolving macro-economic trends are not expected to directly impact lenders, their target borrower segments may be affected by overall demand weaknesses or income shocks arising from these developments. For instance, transport operators linked to the apparel sector, which relies on exports, could experience reduced capacity utilization.

Similarly, employees of these units may encounter liquidity challenges in servicing existing debts (microfinance, personal loans, home loans) due to income shocks, according to the report.

Despite these challenges, the soothing effect of decreasing fund costs is expected to support margins and overall earnings for lenders.

ICRA maintains a stable outlook for banks and non-banks (excluding microfinance, where the outlook is negative) due to these factors and adequate current capital buffers, which can absorb unforeseen losses.