Credit growth in the Indian banking sector is expected to remain reasonably healthy, supported by stronger corporate and MSME lending, even as El Nino conditions pose a risk to agricultural loans, according to a Yes Securities report published on June 29, 2026. The report does not anticipate any material rise in credit costs in FY27 compared with FY26 and sees no significant one-time impact from the implementation of Expected Credit Loss (ECL) norms in FY28.
Credit Costs and Loan Health
The report states that credit costs associated with unsecured loans, which had increased earlier due to a domestic economic slowdown and overheating in that segment, have started declining. However, they may remain somewhat sticky because of a slow recovery in nominal GDP growth and the potential impact of El Nino on the microfinance sector. MSME loans also remain a segment under watch due to possible disruptions arising from the West Asia conflict and trade-related challenges, though the report does not expect any major build-up of stress in the segment and notes that the Emergency Credit Line Guarantee Scheme (ECLGS) could provide protection if required.
Key Monitorables for the Banking Sector
The report identifies three key monitorables:
- The impact of the West Asia conflict
- The impact of El Nino
- The lagged impact of trade tariffs
On El Nino specifically, the report observes: "El Nino may impact some agri loans but past experience tells us that this may not be overly disruptive, although we will monitor the possibility of a Super El Nino."
Credit Growth and Net Interest Income Outlook
Yes Securities reports that credit growth has reached around 17 per cent levels, driven by improved corporate loan growth and stronger MSME lending. While growth may moderate somewhat by the end of the financial year, it is expected to remain broadly in the low-to-mid teens range.
Net interest income (NII) growth for the report's coverage banks is projected to recover strongly:
| Metric | FY26 | FY27 | FY28 | FY29 |
|---|---|---|---|---|
| NII Growth | 5.3% | 16.1% | 16.1% | 15.1% |
This recovery is a positive signal for bank profitability and the cost of trade finance intermediation.
Trade and Business Implications
For finance executives and treasury professionals tracking trade-affected markets, the report's findings carry several implications. Stable credit costs and healthy lending growth suggest that access to working capital and trade finance should remain robust. However, the lagged impact of trade tariffs and the West Asia conflict are flagged as monitorables that could disrupt MSME lending, a key source of financing for small exporters and importers. The potential for El Nino to affect agricultural loans also warrants attention from companies with supply chains exposed to Indian agriculture, as disruptions could impact input costs and credit availability for agri-based businesses. The report's expectation of no major stress in MSME loans, backed by the ECLGS safety net, provides some reassurance, but the unpredictable nature of weather events and geopolitical tensions means risk managers should maintain close surveillance on these factors.
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