India’s Banking Credit Outlook: Credit Growth, Deposit Accretion, & Asset Quality in FY2025-26

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External / Market Borrowing Rates (Bond / CP / NCD rates)

These are rates in bond markets, commercial paper, non-convertible debenture etc., determined largely by market expectations, credit spread, demand and supply.

Very quick to reflect repo or policy changes; yields fall faster, in many cases, because market adjusts immediately. 

Corporates observing cheaper costs via bond yields may prefer bond markets if bank lending still priced higher.

Which Type Best to Borrow On?

If you are a corporate (or borrower) trying to choose:

• Floating rate / external benchmark linked loans are generally better when policy rates are falling, because you benefit sooner (once benchmark resets or when bank passes on the cut).
   
• Fixed rate is better when interest rates are expected to rise (or if inflation risk is high), because you lock in cost.
   
• MCLR-based / internal benchmark loans may lag, so may be suboptimal if speed of transmission matters.
   
• Bond / capital markets may often offer more favourable cost, especially for large borrowers, if market rates and yields drop, plus it may be more flexible terms, longer maturity etc.

Corporates tend to prefer bond / market borrowing when bank rates (floating or MCLR etc.) lag behind bond yields, or when bond yields become comparatively lower, or when banks’ credit appraisal or loan conditions are stringent.

Why Businesses Prefer Bond Markets Rather Than Bank-Approved Loans
 

• Cost Differential & Speed of Adjustment: As noted, bond markets reflect changes in interest rates quickly. If the repo rate is cut, bond yields (especially AAA, or corporate bond yields) fall rapidly. Bank lending rates, particularly on floating or internal benchmark loans (MCLR, etc.), may lag. This causes corporations to find bond market borrowing cheaper.
   
• Terms & Flexibility: Bonds or CPs often offer larger amounts, more flexible repayment schedules, sometimes more favorable covenants. Bank loans may involve more documentation, collateral, and stricter covenants.
   
• Avoiding Bank Balance Sheet Constraints / Regulatory Costs: Banks have capital constraints, regulatory risk weights, provisioning burdens. Lending to NBFCs, or other corporates may carry higher risk weights or regulatory costs. Sometimes the regulation makes bond financing more attractive.
   
• Alternative Access and Liquidity: For large corporations, capital markets are well developed, sovereign support or confidence allows them to issue bonds or commercial paper rather than tie-up with banks.
   
• Diversification of Funding: Corporates may prefer to diversify their debt sources: not rely only on banks, but also bond markets, which may offer longer maturities.

CRISIL explicitly noted that corporates shifting to bond markets was one of the reasons corporate credit growth was weak in Q1 FY26.

What is Deposit Growth? Why has RBI included a Four-Phased Cash Reserve Ratio (CRR) Reduction?

Deposit Growth

Deposit growth is the rate at which the total deposits held in the banking system grow over time. It includes new deposits, renewals, and possibly transfers between banks, minus withdrawals. It reflects household savings, corporate deposits, term deposits, savings accounts, etc.

Strong deposit growth is critical because banks use deposits to fund advances (loans), to maintain liquidity, to meet regulatory liabilities (CRR, SLR), and to ensure cost of funds remains manageable.

If deposit growth lags, banks may face “funding gaps”, be forced to depend on expensive wholesale or interbank borrowing, or reduce credit growth.

RBI’s Four-Phased CRR Reduction

To help boost deposit growth / liquidity for banks, RBI has proposed / implemented a four-phased reduction in Cash Reserve Ratio (CRR). Lower CRR means banks need to keep a smaller fraction of their deposits in non-interest bearing reserves with RBI, freeing up more funds to lend or to invest. The CRR reduction is phased to avoid liquidity risk or inflationary pressure.

From CRISIL’s reports:

• As of September 2025, RBI is scheduled to reduce CRR in stages: the first cut effective from September. (One reference in MOFSL preview mentions “100 basis points cut in CRR, effective September 2025”.)
   
• Exact phased schedule: Typically RBI gives notice before each phase; but I did not find a fully public schedule in the sources I reviewed that lists all four phases with amounts & dates. The referenced source says “four-phased cash reserve ratio reduction” in connection with boosting deposit growth; but precise details (percentages per phase, which date) weren’t fully detailed in the public extract I accessed. CRISIL mentions that CRR cuts will ease liquidity, support deposits, etc.

What is Asset Quality in terms of Loans?

Asset quality refers to how “healthy” a bank’s loan book is: specifically, the proportion of loans that are performing vs non-performing (i.e. stressed: not being serviced, in default or arrears). Key metrics include Gross Non-Performing Assets (GNPA), Net NPAs, Provision Coverage Ratio, etc. A high ratio of NPA means a higher share of loans are bad, which requires provisioning, reduces profitability, reduces capital, and imposes risk on the bank.

Analogy:

Imagine you lend out many umbrellas to people, and expect them to return them in good condition. If some borrowers don’t return them (or return broken ones), then your stock of usable umbrellas declines, affecting how many you can lend next time, and rendering your business risky. The more defective or unreturned umbrellas you hold, the worse your ability to do business.

CRISIL’s Projection & Comparison

CRISIL estimates that the gross NPA ratio for banks will be around 2.3-2.5% by end of FY 2026. It adds that while asset quality will show some stress (especially in MSME / small business/unsecured retail segments), overall GNPA will remain low compared to historical highs.

To compare:

• As of March 31, 2025, CRISIL expected asset quality to be stable, with GNPA 2.4%.
   
• Earlier, in March 2024, GNPA was higher ( 2.8%) in many reports.

So the forecast is for a modest increase or stability from current levels, but no large jump as seen in past cycles.

Conclusion

Putting it all together:

• CRISIL projects that bank credit growth will accelerate in FY 2025-26, perhaps reaching 11-12% (or under favourable conditions even 12-13%), up from 11.0-11.5% in FY 2024-25. Retail credit and MSME/disbursals via NBFCs are expected to be among the stronger drivers.
   
• The first quarter (Q1 FY26) was sluggish, with credit growth 9.5-10%, lower than in comparable quarters in earlier years; deposit growth is holding at 10%, but household contributions to deposit accretion are reportedly weakening, this matters because households’ deposits tend to be more stable and cheaper.
   
• Corporates are being more selective in bank borrowing, preferring bond markets or market instruments when bank loan rates lag bond yields or when transmission of rate cuts is delayed. Types of lending (floating/external benchmark vs fixed vs MCLR etc.) matter, and delays in transmission of rate cuts into bank lending rates (especially MCLR) reduce attractiveness of bank loans.
   
• Deposit growth is constrained by weak household accretion and competition from other savings / investment vehicles. RBI has introduced a phased CRR reduction (among other regulatory measures) to inject liquidity and encourage deposit growth.
   
• Asset quality is forecast to remain relatively stable; CRISIL’s estimate for gross NPAs is 2.3-2.5% by end FY26. However, risks remain in small business, MSME, unsecured retail, and where household indebtedness is elevated.

The sluggish economy, weak household deposit accretion, and corporate substituting bank loans with bond market financing all pose challenges. Banks must manage funding costs carefully, improve transmission of rate cuts, ensure regulatory changes are implemented, and watch asset quality especially in riskier loan segments.