Credit Market To See Headwinds In FY26, Says India Ratings

Fiscal 2026 will be a year of headwinds for the credit market, led by externalities, length and breath of indebtedness in the retail lending space, volatile banking system liquidity and domestic growth-inflation conundrums, according to India Ratings and Research.

While deposit rates have peaked out, India Ratings believe that the structural shift in the system will keep the downward rigidity intact. As a consequence, banks' lending rate is expected to rise in fiscal 2026, it said.

The rating agency also expects short-term rates to witness volatility in sync with liquidity and external conditions.

While liquidity has improved on a year-to-date basis in the current fiscal, it will remain volatile in the next fiscal and will act as a deterrent for commercial banks in terms of addressing adverse loan-to-deposit ratios and asset liability pricing, as per India Ratings.

Subsequently, volatility in the banking system may have an impact on domestic money market, it added.

"In the milieu of external headwinds and weakening domestic credit conditions, the overall credit market is expected to see higher volatility and elevated spreads especially for the entities with a weak credit outlook," Soumyajit Niyogi, director, core analytical group at India Ratings said.

The rating agency expects spreads of non-banking financial companies to increase further with the rising uncertainties over asset quality and expects moderate-to-strong deterioration in various asset classes during the year.

"Therefore, it is obvious that the credit premium would inch up in the financial sector, applicable for both bank and capital market lending. While NBFCs' asset quality could weaken, corporates' asset quality might remain resilient with minor moderation," it stated in a release.