LEAP INSIGHTS FOUNDATION

Executive Summary

Indian banking sector credit growth changed over the past two fiscal years. After expansion in FY24, credit offtake moderated in FY25. This deceleration was a consequence of macro-prudential tightening measures by the Reserve Bank of India (RBI) and a high base effect from the preceding year. The central bank’s actions were aimed at specific segments to ensure financial stability.

The aggregate slowdown conceals divergences. There was a cooling in credit to agriculture and the services sector. The services sector was impacted by a slowdown in lending to Non-Banking Financial Companies (NBFCs). The personal loan segment, while also moderating, was the primary component of credit expansion. Industrial credit remained tepid, though some manufacturing-linked sub-sectors showed signs of a revival. A policy change on infrastructure financing may affect future growth.

A development has been the shifting dynamics between institutional players. Public Sector Banks (PSBs) outpaced Private Sector Banks (PVBs) in credit growth during FY25. This occurred as PVBs showed increased caution due to emerging asset quality pressures in unsecured retail portfolios.

The health of the banking system presents a paradox. Asset quality indicators have reached their best levels in over a decade, with Gross Non-Performing Asset (GNPA) ratios falling. This improvement is a legacy of resolving corporate NPAs. It is juxtaposed with new stress emerging in the unsecured personal loan and credit card segments. This signals a transition in the nature of credit risk.

The policy environment has been dynamic. The RBI used monetary policy levers like interest rate and reserve ratio cuts for stimulus, while employing regulatory instruments to manage sectoral activity. This approach is constrained by a gap between credit and deposit growth. This funding gap is a headwind, putting pressure on bank margins and potentially capping credit expansion.

For FY26, rating agencies forecast a rebound in credit growth. This outlook is predicated on the transmission of monetary easing, regulatory changes, and a potential private capital expenditure revival. The trajectory of Indian bank credit will depend on a transition from a consumption-led model to one balanced with investment-led growth, supported by a financially sound PSB ecosystem. Deposit mobilization and managing new forms of credit risk will be strategic imperatives for the sector.

Section 1: Aggregate Credit Trajectory: A Path of Policy-Induced Moderation

The trajectory of bank credit growth in India has transitioned from a post-pandemic surge to a period of consolidation. FY25 witnessed a deceleration, an outcome of regulatory action and statistical base effects. As the economy moves into FY26, data reveals continued moderation, alongside the central bank’s policy actions. This occurs against the backdrop of India’s credit-to-GDP ratio, which signals long-term potential and the challenge of financial deepening.

1.1 The FY25 Deceleration: From Post-Pandemic Boom to Cooling

After a period of expansion, the growth of bank credit in India moderated during FY25. For the fiscal year ending in March 2025, the overall credit growth for Scheduled Commercial Banks (SCBs) was reported at 12.1%, 11.1%, and estimated between 11.0% and 11.5%. This is a decline from the previous fiscal year, where growth rates were recorded at 15.3%, 16%, and 16.4% (excluding the HDFC merger impact). This slowdown marked the slowest pace of sector loan growth in four years.

This deceleration was not indicative of economic weakness but was an anticipated outcome. The growth of FY24 created a base effect, making year-on-year comparisons in FY25 appear subdued. The slowdown was a consequence of macro-prudential measures implemented by the Reserve Bank of India (RBI). The central bank moved to cool segments showing signs of exuberance, particularly unsecured retail lending and credit to Non-Banking Financial Companies (NBFCs). This policy was designed to prevent the build-up of systemic risk and guide credit growth towards a more sustainable path.

Table 1: Key Banking Aggregates (y-o-y Growth %)

Indicator	FY24(y-o-y %)	FY25 (y-o-y %)	May 30, 2025 (y-o-y%)
Non-Food Credit Growth	16.2%	12.1%	9.8%
Aggregate Deposit Growth	12.7%	10.6%	10.0%
Credit-Deposit Ratio	78.1%	79.1%	79.6%

1.2 High-Frequency Dynamics: A Volatile Start to FY26 and Signs of Easing

The moderating trend continued into the first quarter of FY26. Year-on-year (y-o-y) non-food bank credit growth slowed to 11.2% as of the fortnight ended April 18, 2025, compared to 15.3% during the corresponding period in the previous year. The deceleration became more pronounced in May, with non-food credit growth falling to 9.8% y-o-y for the fortnight ended May 30, 2025, a drop from the 16.2% growth seen a year prior. By the end of May 2025, overall bank credit growth had touched a three-year low of 8.97%.

This dip raised concerns about the risk of over-tightening. The policy response followed. In its monetary policy review in the first week of June 2025, the RBI announced a 50 basis point (bps) cut in the repo rate. The impact of this easing measure began to surface in the subsequent data. For the fortnight ended June 13, 2025, credit growth showed a recovery, picking up to 9.62%.

This sequence of events highlights the RBI’s data-dependent approach to policymaking. The central bank is engaged in calibration, monitoring high-frequency indicators and acting to navigate between controlling inflation and supporting growth. The fall in May’s credit growth appears to have been a trigger for the easing in June. The focus has shifted from taming inflation to a more balanced approach that supports growth, facilitated by a benign inflation outlook.

1.3 The Credit-to-GDP Ratio

Placing India’s credit growth in a global context reveals potential. India’s level of financial deepening, as measured by the credit-to-GDP ratio, remains lower than that of its international peers. Data from the Bank for International Settlements (BIS) for the year 2020 showed India’s bank credit-to-GDP ratio at just over 56%. This was below the average for emerging market economies, which stood at 135.5%, and less than half of the G20 average. More recent data from the International Monetary Fund (IMF) for 2023 places India’s total private debt to GDP at 98.42%, with household debt at 39.16% and non-financial corporate debt at 59.26%. India’s external debt-to-GDP ratio inched up to 19.1% in FY25 from 18.5% in FY24.

This low credit penetration underscores the runway for future credit growth to fuel economic expansion and highlights the need for access to formal credit. It also contributes to systemic resilience. The low ratio has resulted in a negative credit-to-GDP gap, a BIS indicator used to assess the risk of a financial crisis arising from excessive credit build-up. A negative gap, such as India’s, suggests a lower probability of a credit-fueled boom-bust cycle compared to several other Asian economies that exhibit positive gaps. This provides the RBI with policy space to pursue growth-supportive measures without stoking fears of financial instability.

Section 2: A Granular View: Divergent Sectoral Credit

Beneath the headline moderation in aggregate credit growth lies a divergent sectoral landscape. The slowdown in FY25 was not uniform; it was characterized by contrasting trends across the key pillars of the economy. While the industrial sector continued its pattern of subdued growth, agriculture and services experienced a deceleration, driven by high base effects and specific regulatory actions. Throughout this period, the personal loan segment, though also slowing, remained the most resilient driver of credit offtake. This view reveals the targeted nature of the RBI’s policy interventions.

Table 2: Sectoral Deployment of Bank Credit (y-o-y Growth %)

Sector	Growth (April 19, 2024)	Growth (April 18, 2025)	Growth (May 31, 2024)	Growth (May 30, 2025)
Agriculture & Allied Activities	19.8%	9.2%	21.6%	7.5%
Industry	6.9%	6.7%	8.9%	4.9%
Services	19.5%	11.2%	11.2%	9.4%
Personal Loans	17.0%	14.5%	19.3%	13.7%

2.1 Industrial Credit: Muted Growth with Pockets of Revival

Credit flow to the industrial sector has remained subdued. For the fiscal year ending March 2025, credit to industry grew by 8.0%, a rate that was unchanged from the previous year. This persisted into the new fiscal year, with y-o-y growth recorded at 6.7% in April 2025 (compared to 6.9% a year prior) and further slowing to 4.9% in May 2025 (down from 8.9% a year prior).

However, these aggregate figures mask underlying dynamics. A look at sub-sectors reveals areas of strength. Credit to key manufacturing-linked areas such as ‘all engineering’, ‘construction’, and ‘textiles’ has shown accelerated y-o-y growth in recent months. This could be an indicator of a revival in the private capital expenditure (capex) cycle.

In contrast, a drag on industrial credit has been the performance of the infrastructure segment. Lending to this sector decelerated through much of FY25. Analysis from Moody’s indicates that infrastructure credit shrank by 0.8% between April 2024 and April 2025. This slowdown was a response to an RBI draft proposal in May 2024 that suggested tighter lending norms, including a 5% provisioning requirement for loans to under-construction projects. The RBI eased the final guidelines issued in June 2025, reducing the mandatory provisioning to 1%. This policy change is expected to reduce uncertainty and revive credit flow to the infrastructure sector.

2.2 Agricultural Credit: A Deceleration from a High Base

The agriculture and allied activities sector witnessed the most pronounced slowdown in credit growth. From a y-o-y growth rate of 21.6% in May 2024, the pace of lending fell to 7.5% in May 2025. The growth rate in April 2025 stood at 9.2%, a fall from the 19.8% recorded in April 2024.

This drop is attributable to a high base effect. The previous year had seen strong credit offtake in the agricultural sector, making the subsequent year’s growth appear muted in comparison. This trend warrants monitoring to ensure that the slowdown does not signal underlying stress in the rural economy.

2.3 Services Sector: The NBFC-Induced Drag

The services sector also experienced a moderation in credit offtake. The y-o-y growth rate for the sector fell to 9.4% in May 2025 from a high of 20.7% a year earlier. The data for April 2025 showed a similar trend, with growth moderating to 11.2% from 19.5% in the previous year. For the full fiscal year ending March 2025, services credit grew by 13.4%, a slowdown from the 20.8% clocked in FY24.

The driver of this slowdown was the deceleration in credit to Non-Banking Financial Companies (NBFCs). This was a consequence of a specific RBI regulatory action. In November 2023, the RBI increased the risk weights on bank credit exposures to NBFCs by 25 percentage points. This made it more capital-intensive for banks to lend to NBFCs. Although the RBI rolled back this increased risk weight in April 2025, its impact was visible in the credit data throughout FY25.

Despite the overall moderation in the services sector, certain sub-segments remained resilient. Credit growth to ‘trade’ and ‘computer software’ continued to be robust.

2.4 Personal Loans: The Resilient but Moderating Growth Engine

The personal loans segment has been the main pillar supporting overall bank credit growth, though its pace has also tempered. Y-o-y growth in this segment stood at 13.7% in May 2025, down from 19.3% a year prior. This followed a growth rate of 14.5% in April 2025 (versus 17.0%) and 14.0% for the full fiscal year FY25 (versus 17.6%).

The moderation within this segment is attributed to a slowdown in sub-categories that were previously growing at a fast pace, namely ‘vehicle loans’, ‘credit card outstanding’, and the ‘other personal loans’ category. These were the segments targeted by the RBI’s prudential tightening measures. Providing a floor to the segment’s growth has been the performance of housing loans, which account for nearly half of all personal loans and have remained relatively stable.

The share of personal loans in total outstanding non-food credit has risen to nearly one-third (32.7%) as of 2024-25, an increase from 24.1% five years ago. Its share now surpasses that of credit to the entire industrial sector.

The sectoral data reveals the precision of the RBI’s policy toolkit. The central bank engineered a cooling of the NBFC and unsecured personal loan segments through risk weight adjustments, without triggering a broad-based collapse in credit across the entire economy.

Section 3: Shifting Competitive Landscape: Public Sector Banks

FY25 marked a moment in the competitive dynamics of the Indian banking industry. Public Sector Banks (PSBs), after a period of being overshadowed by private sector counterparts, emerged as the leaders in credit growth. This reversal is the culmination of a multi-year process of balance sheet repair and a strategic realignment influenced by regulatory priorities. This section analyzes this shift, exploring the drivers of PSB resurgence and PVB moderation.

3.1 A Reversal of Roles: PSBs Outpace Private Peers

FY25 witnessed a shift in lending patterns. PSBs recorded a loan growth of 12.4% or 12.2%, outpacing the growth of Private Sector Banks (PVBs). PVBs, which had posted credit growth above 15% for the preceding three years, saw their loan growth decelerate to 9.5%. This marked the steepest decline for private banks and their lowest growth level since FY21.

This is a change from the established pattern where PVBs were the engines of credit expansion. The resurgence of PSBs signals a rebalancing in the banking landscape, a trend that rating agencies like Fitch expect to continue for at least another year. This shift has resulted in PSBs gaining market share in credit distribution for the first time in recent memory.

Table 3: Bank Group-wise Credit Growth Comparison (y-o-y %)

Bank Group	FY24 Credit Growth	FY25 Credit Growth
Public Sector Banks (PSBs)	13.6%	12.2%
Private Sector Banks (PVBs)	>15.0% (sustained)	9.5%
All Scheduled Commercial Banks	15.3%	11.1%

3.2 Analyzing the Divergence: Balance Sheet Strength Meets Regulatory Caution

The divergence in performance between PSBs and PVBs can be attributed to a confluence of factors related to balance sheet health, regulatory focus, and strategic orientation.

Drivers for Public Sector Bank Ascendancy:

A factor behind the revival of PSBs is the culmination of a balance sheet repair cycle. Following the Asset Quality Review (AQR) initiated in 2015, which led to the recognition of stressed assets, PSBs went through a challenging period. Their Gross NPA ratio peaked at 14.58% in March 2018. In response, the government implemented a “4R’s” strategy: Recognition of NPAs, Resolution and Recovery through the Insolvency and Bankruptcy Code (IBC), Recapitalization of banks, and Reforms in the banking ecosystem. The government infused capital, amounting to over Rs. 2.87 lakh crore in the three years leading up to FY20.

This effort has yielded results. By FY25, PSBs had cleaned up their loan books and were reporting record profitability, with a cumulative net profit of Rs 1.78 lakh crore, a 26% increase over the previous year. This financial strength has given them the capacity to ramp up lending. This revival is further supported by a mandate from the government. The Finance Minister has nudged PSBs to leverage the RBI’s recent rate cuts to increase lending to productive sectors of the economy.

Drivers for Private Sector Bank Moderation:

Simultaneously, the factors that previously propelled PVBs are now acting as constraints. Their expansion was concentrated in the unsecured retail loan segment. As the RBI grew concerned about the growth and potential for stress in this category, its macro-prudential tightening measures disproportionately impacted PVBs. The increased risk weights on consumer credit and credit card receivables made further expansion in these areas less attractive.

Consequently, PVBs are now contending with the asset quality implications of their earlier strategy. The RBI has flagged a rise in write-offs among PVBs. Rating agencies have also noted that smaller private banks are likely to face more asset quality pressures due to high delinquency rates in their unsecured lending books. Furthermore, PVBs often operate with higher Loan-to-Deposit Ratios (LDRs), making them more vulnerable to the challenge of deposit growth lagging credit growth, thereby constraining their ability to lend.

This institutional rebalancing has the potential to be a catalyst for the broader economy. PSBs have historically been the primary financiers of industry and infrastructure. Their renewed lending capacity, combined with a government directive and a more favorable regulatory environment for infrastructure finance, creates an alignment of factors. This could be the key to unlocking the private capex cycle and reviving corporate credit growth.

Section 4: The Health of the Loan Book: Improving Quality and Emerging Stress

The Indian banking system’s asset quality presents a paradox. Headline indicators of non-performing assets have shown an improvement, reaching their best levels in over a decade. This reflects the resolution of the legacy corporate stress that affected the system for years. On the other hand, a new fault line is emerging, with rising stress in the unsecured retail loan segments that powered the recent credit boom. This transition in the nature of credit risk, from corporate defaults to retail stress, marks a new chapter for risk management in Indian banking.

4.1 The NPA Turnaround: A Multi-Year Story

The improvement in the asset quality of Indian banks over the past few years has been notable. The Gross Non-Performing Asset (GNPA) ratio for Scheduled Commercial Banks (SCBs) has declined from its peak of 11.2% in March 2018. By September 2024, the GNPA ratio had fallen to a 12-year low of 2.6%, and by March 2025, it was estimated at 2.3%.

The Net NPA (NNPA) ratio, which accounts for provisions made by banks against bad loans, stands at a decadal low of approximately 0.6% as of September 2024. This improvement has been observed across all bank groups and sectors.

This turnaround was driven by a combination of factors. Lower slippages (fresh additions to NPAs), recoveries, and write-offs of legacy bad loans have contributed to cleaning up bank balance sheets. A crucial element of this has been the improvement in the asset quality of the large corporate loan book. The GNPA ratio for large borrowers fell from 4.5% in March 2023 to 2.4% in September 2024, with none of the top 100 borrowers being classified as NPAs during that period. This indicates that the issue of large, stressed corporate accounts that defined the previous NPA cycle has been addressed.

Table 4: Scheduled Commercial Banks’ Asset Quality Indicators (%)

Indicator	March 2018 (Peak)	March 2023	Sept        2024	March2025
Gross NPA Ratio (GNPA)	11.2%	3.9%	2.6%	2.3%
Net NPA Ratio (NNPA)	6.0% (approx.)	1.0%	0.6%	~0.6%

4.2 A New Fault Line: Rising Stress in Unsecured Retail Lending

Beneath the surface of these headline numbers, a new area of concern is emerging. Multiple authorities and rating agencies have flagged rising stress in the unsecured retail lending segment. This category, which includes personal loans and credit card debt, was a driver of credit growth in recent years, particularly for private sector banks.

The data reveals a trend. Gross NPAs in the credit card segment surged by 28.42% to reach ₹6,742 crore in the twelve months ending December 2024, with the NPA ratio for this segment rising to 2.3% from 2.06% a year earlier. Slippages in the overall retail loan portfolio are now being dominated by unsecured credit. In the first half of FY25, unsecured loans accounted for 51.9% of all new NPAs in the retail category.

The RBI has also raised a question regarding the transparency of these figures, expressing concern over a rise in write-offs, especially among private sector banks. The central bank has suggested that this practice could be partly affecting the true extent of the deterioration in asset quality within these unsecured portfolios. This implies that the reported NPA figures might not fully capture the underlying stress building up in this high-growth, high-risk segment.

4.3 The Forward-Looking Risk Profile

The confluence of these trends suggests that the era of continuous, broad-based improvement in asset quality may be drawing to a close. The focus is now shifting from resolving legacy issues to managing new, emerging risks. This is reflected in the forward-looking assessments from regulatory bodies and rating agencies.

The RBI’s own stress tests project that, even under a baseline scenario, the system-wide GNPA ratio is likely to edge upwards, rising from its current lows to 3.0% by March 2026. In more severe risk scenarios, this ratio could climb to over 5%. Similarly, rating agency ICRA forecasts that fresh slippages will rise in FY25 and FY26, driven primarily by stress in the retail sector. Moody’s, while expecting overall NPLs to remain stable in a 2-3% range, concurs that unsecured retail loans will exhibit weaker quality and that smaller private banks will see more asset quality pressure.

It is important to note that the banking system is not on the brink of a crisis. Capital adequacy ratios remain robust and well above regulatory minimums, providing a cushion to absorb potential losses. However, the direction of the trend is changing. The challenge for the banking system has transitioned. The old problem was managing a few hundred large, concentrated corporate NPAs. The new challenge is managing the risk associated with millions of small-ticket, dispersed retail loans. This requires a shift in risk management, moving away from traditional appraisal towards data-driven underwriting, real-time monitoring, and digital early warning systems. The ability of banks, particularly those with exposure to unsecured retail credit, to adapt their risk management frameworks to this new reality will be a determinant of their performance and stability in the coming years.

Section 5: Policy, Regulation, and Funding

The trajectory of bank credit in India is shaped by an interplay of policy, regulation, and structural market dynamics. The Reserve Bank of India has employed a multi-pronged approach, using a combination of monetary policy for stimulus, regulations for sectoral management, and liquidity operations to ensure transmission. This policy framework operates within the constraint of a gap between credit and deposit growth, while also being influenced by government-led initiatives aimed at directing credit towards priority sectors.

5.1 Monetary Policy Pivot: From Tightening to Easing

The stance of India’s monetary policy has pivoted. Following a tightening cycle that saw the policy repo rate increase by a cumulative 250 basis points (bps) between May 2022 and February 2023 to reach 6.5%, the RBI has shifted gears towards supporting economic growth. With headline inflation moderating and remaining within the central bank’s target band, the Monetary Policy Committee (MPC) found room to act.

In a move that was more assertive than some anticipated, the MPC in its June 2025 meeting delivered a 50 bps cut in the repo rate, bringing it down to 5.5%. This was a signal of the RBI’s intent to frontload the easing cycle to provide a stimulus to the economy. The rate cut was complemented by a liquidity-enhancing measure: a 100 bps reduction in the Cash Reserve Ratio (CRR), the portion of deposits that banks must hold with the RBI. This CRR cut is set to be implemented in phases and is expected to inject approximately Rs 2.5 lakh crore of primary liquidity into the banking system. The goal of this dual easing is to lower the cost of funds for banks and encourage the transmission of these lower rates to borrowers, thereby reviving credit demand and supporting consumption and investment.

5.2 Regulatory Interventions: Calibrated and Sector-Specific

Beyond monetary policy, the RBI has demonstrated a calibrated approach to regulation, using macro-prudential tools to address specific sectoral risks and opportunities. This targeted approach has been a feature of the recent policy landscape.

The sequence of actions illustrates this approach:

• Targeted Tightening (November 2023): In response to “exuberance” in certain segments, the RBI increased the risk weights on consumer credit, credit card receivables, and bank lending to NBFCs. This was an action aimed at curbing the growth in unsecured lending and preventing the build-up of systemic risk.
• Selective Easing (April 2025): Recognizing that the measures had achieved their objective and that credit flow to NBFCs had slowed, the RBI rolled back the increased risk weights on bank loans to NBFCs. This was a targeted easing measure designed to restore credit flow to this sector without undoing the caution on unsecured retail loans.
• Stimulative Easing (June 2025): To address the stagnation in infrastructure credit, the RBI finalized its new project finance guidelines. It set the provisioning requirement for under-construction projects at a lower-than-anticipated 1%, a contrast to the 5% that was initially proposed. This measure is expected to be a catalyst for reviving infrastructure lending.

This use of regulatory tools showcases a policy framework that is capable of nuanced interventions. The RBI is moving beyond relying solely on interest rates and is instead deploying a toolkit to manage the objectives of financial stability and economic growth.

5.3 The Funding Equation: The Credit-Deposit Gap

A structural challenge that affects the Indian banking system is the gap between credit growth and deposit growth. For several years, credit offtake has outpaced the rate of deposit mobilization. In FY25, for instance, SCB credit grew at 12.1%, while aggregate deposits grew at a pace of 10.6%. This imbalance has kept the system-wide Credit-to-Deposit (C-D) ratio at elevated levels, frequently hovering above the 80% mark. While the ratio has dipped below 80% in the most recent fortnights, this was more a function of slowing credit growth than an improvement in deposit mobilization.

This funding gap has consequences. It forces banks to increase their reliance on more expensive forms of wholesale funding, such as the issuance of Certificates of Deposit (CDs) and other market instruments, to bridge the gap. This, in turn, puts downward pressure on their Net Interest Margins (NIMs) and profitability. The challenge of deposit mobilization is exacerbated by competition for household savings from other investment avenues, such as mutual funds and equity markets, and a slower growth in low-cost Current Account and Savings Account (CASA) deposits. This structural funding constraint is a headwind that could limit the banking system’s ability to sustain high credit growth in the medium term.

5.4 Targeted Credit Impulses: Government Schemes

The government also plays a role as an architect of credit by using targeted schemes to direct financial resources towards underserved and priority sectors. The Pradhan Mantri Mudra Yojana (PMMY), aimed at providing collateral-free loans to micro and small enterprises, stands out as an impactful initiative.

Since its inception in April 2015, the PMMY has sanctioned over 52 crore loans, disbursing ₹32.61 lakh crore. The scheme has been a driver of the credit boom experienced by the Micro, Small, and Medium Enterprises (MSME) sector. The share of MSME credit in total bank credit has surged from 15.8% in FY14 to nearly 20% in FY24. Even as overall bank credit growth slowed, MSME lending remained robust, registering a y-o-y growth of 17.8% as of June 2025.

Beyond its impact on credit volume, PMMY has been a tool for financial inclusion. 68% of the scheme’s beneficiaries are women, and 50% belong to Scheduled Caste (SC), Scheduled Tribe (ST), and Other Backward Class (OBC) categories, demonstrating its success in channeling credit to previously marginalized segments of the population. Such schemes act as a complementary force to the RBI’s broader policies.

Section 6: Outlook for FY2026

As the Indian banking sector navigates the interplay of moderating growth, shifting competitive dynamics, and a proactive policy environment, the outlook for FY26 is one of cautious optimism. A consensus is emerging among leading rating agencies for a rebound in credit growth, fueled by policy tailwinds. However, this outlook is tempered by structural headwinds, particularly the challenge of deposit mobilization and the need to manage emerging risks in the retail loan portfolio. The future trajectory of credit growth will be determined by a shift towards a more sustainable and investment-led growth model.

6.1 Tailwinds and Headwinds: The Forces Shaping the Future

The outlook for FY26 will be shaped by a set of opposing forces. The ability of the tailwinds to overcome the headwinds will determine the pace and quality of credit expansion.

Key Tailwinds (Factors Supporting Growth):

• Monetary Policy Easing: The RBI’s recent rate and CRR cuts are a significant tailwind. As these cuts are transmitted through the banking system, they will lower borrowing costs for both consumers and corporations, which is expected to stimulate credit demand.
• Supportive Regulatory Environment: The easing of regulations, particularly the rollback of higher risk weights for NBFCs and the finalization of more lenient provisioning norms for infrastructure projects, will provide a boost to credit flow in these sectors.
• Potential for a Private Capex Revival: There is an expectation of a revival in the private capital expenditure cycle. This is supported by the healthy balance sheets of corporates, the renewed lending capacity of Public Sector Banks, and a government push for infrastructure. A pickup in private investment would boost the demand for industrial credit.
• Resilient Domestic Economy: India is projected to remain the fastest-growing major economy. This macroeconomic backdrop provides a foundation for credit demand from both households and businesses.

Key Headwinds (Factors Constraining Growth):

• Deposit Mobilization Challenge: This remains the primary structural constraint. The gap between credit and deposit growth will continue to challenge banks’ ability to fund their loan books. This will intensify competition for low-cost CASA deposits and may force banks to offer higher rates on term deposits, putting pressure on their margins.
• Emerging Asset Quality Concerns: While headline NPA ratios are low, the need to manage and contain the emerging stress in the unsecured retail loan portfolio will necessitate caution, particularly among private sector banks. This could temper their appetite for lending in these segments.
• Pressure on Net Interest Margins (NIMs): The combination of competition for a limited pool of deposits and the downward pressure on lending rates due to the transmission of policy rate cuts is likely to squeeze bank profitability. This could make banks more selective in their lending decisions.

7. Concluding Analysis

The outlook for Indian bank credit growth in FY26 and beyond is contingent upon a rebalancing of the sector. The era of rapid, PVB-led, and predominantly retail-focused credit expansion is giving way to a new phase. The success of this new phase will depend on the system’s ability to transition to a more sustainable and balanced growth model.

This rebalancing has several dimensions. It involves a sectoral rebalancing, shifting the growth engine from being reliant on consumer credit towards a mix that includes a revival in industrial and infrastructure credit. It also entails an institutional rebalancing, with a revitalized Public Sector Bank ecosystem playing a more prominent role in driving credit to productive sectors.

The success of this rebalancing will be determined by three factors. First, the banking system’s ability to innovate and compete to bridge the structural funding gap through improved deposit mobilization. Second, the materialization of the anticipated private investment cycle, which is essential to create demand for corporate credit. And third, the management of the emerging risks in the retail loan portfolio to ensure that these pockets of stress do not become a systemic drag on the system’s health.

The policy environment has laid a foundation for this transition. However, it is the resolution of the structural challenges, particularly on the funding front, and the management of new risks that will define the trajectory of credit growth.