A report released on Thursday predicts that India’s credit growth would continue to be driven by strong credit demand from micro, small, and medium businesses (MSMEs), reaching around Rs 26 trillion in FY26, an increase of about 14. 3% year over year.

According to the combined research by ICRA Limited and ASSOCHAM, credit growth is anticipated to slow to 11. 3–12% in FY27, representing an additional increase of Rs 23. 5 to Rs 25 trillion.

The slowdown is seen as a normalization after a high base the year prior, not as a decrease in demand.

The MSME sector is still hampered by a significant structural gap in access to finance, the study said, and overall bank credit expansion is expected to remain modest, with retail and MSMEs driving incremental growth.

According to Saurabh Sanyal, Secretary General of ASSOCHAM, improving MSME access to finance continues to be essential for promoting inclusive growth and ensuring that the benefits of economic growth are shared equitably among sectors and regions.

Although the financial system is now structurally more robust and resilient than it was in the past, changing credit dynamics necessitate a change from conventional lending methods, according to ICRA Ltd Executive Director K. Ravichandran.

According to the report, demand for credit is expected to remain “buoyant,” bolstered by ongoing formalization, greater balance sheets across industries, and rising economic activity.

As supply chains get more established and smaller businesses get integrated into formal production systems, MSMEs have become crucial drivers, fostering economic growth in urban and semi-urban areas.

The report further highlighted that formalization programs, higher classification thresholds, and policy support have increased credit visibility, allowing lenders to better analyze borrower profiles and extend credit availability.

The report said that the formalization helped the share of MSMEs in incremental bank lending to gradually increase, with better data availability and transparency assisting credit underwriting and risk assessment.

The report stated that “a large structural credit gap persists due to heterogeneous risk profiles, limited collateral and information opacity,” which inhibits the timely and sufficient flow of credit, particularly for smaller businesses and those operating outside fully formalized structures.