Mumbai, April 8 (NationPress) The Reserve Bank of India (RBI) has implemented several measures to ease monetary policy recently, which are projected to facilitate a year-on-year credit growth of approximately 10.8%, reaching between Rs 19 lakh crore and Rs 20.5 lakh crore for the fiscal year 2025-2026, as stated in a report by ICRA released on Tuesday.

These measures encompass reducing the repo rate, postponing the proposed adjustments to the liquidity coverage ratio (LCR) framework, and providing additional support for infrastructure projects. Furthermore, the rollback of increased risk weights on lending for unsecured consumer credit and non-banking financial companies (NBFCs) contributes to this supportive environment.

Moreover, the RBI is injecting durable liquidity via open market operations (OMO), including purchasing Government bonds and conducting forex swaps with banks, which is anticipated to enhance liquidity and expedite the transmission of the ongoing policy rate cuts, according to the report.

Nonetheless, challenges such as ongoing issues in deposit mobilization, a high credit-deposit (CD) ratio, and increasing stress in unsecured retail and small business loans may hinder credit growth. As a result, the pace of credit expansion is likely to fall short of the recent peaks observed in FY2024, the report adds.

The pro-growth regulatory approach has rekindled lenders’ enthusiasm for credit growth in the fourth quarter of FY2025 after a temporary slowdown earlier in the fiscal year.

The liquidity injections recently announced by the RBI appear to be aimed at accelerating the transmission of rate cuts. A significant challenge faced by the banking sector in recent years has been the ability to attract deposits at competitive rates, particularly retail deposits, due to pressures on the LCR.

Heightened competition from alternative investment options and a growing preference for term deposits have resulted in a decrease in the share of low-cost current and savings account (CASA) balances, which in turn affects the banks' cost structure. These challenges are likely to persist in the near term, potentially delaying the transmission of the RBI's rate cuts to banks' funding costs, thereby affecting margins.

Additionally, with the elevated CD ratio, the banking sector has become increasingly reliant on wholesale deposits, leading to a gradual decline in the average LCR.

ICRA Vice President Sachin Sachdeva noted, "Given the elevated CD ratio, the competition for deposit mobilization is expected to remain fierce throughout FY2026, which could restrict banks' capacity to reduce deposit rates. However, lending rates may face pressure due to the decline in external benchmark-linked loans and competition from the debt capital markets. With expectations of a cumulative 75 basis points (bps) reduction in repo rates beginning in February 2025, we project a 15-17 bps decline in net interest margins (NIMs) for banks during FY2026."

"ICRA anticipates a downward trend in profitability for FY2026, with the return on assets (ROA) and return on equity (RoE) projected at 1.1-1.2% and 12.1-13.4% respectively. Nevertheless, these figures are expected to remain adequate for the projected growth without significant reliance on fresh capital, leading to ICRA's Stable outlook for the sector," he added.