India Banks: 20% Credit Growth, Private Lenders Lead in FY27

India’s banking sector initiated FY27 with robust performance, achieving approximately 20% year-on-year credit growth in the June quarter. This figure represents the highest level in over four years, even as deposit growth continued to lag behind loan expansion, according to a recent Bernstein report.

The report, titled ‘India Financials: State of the sector – Attractive aggregates, mixed competitive dynamics’, highlights a broad-based recovery in credit. This growth is predominantly fueled by strong industrial and services lending, while asset quality remains stable and profit margins are near decade highs.

Key Growth Segments & Figures

• Industrial credit growth accelerated to 19.2% in June.
• Services credit expanded by 21.4%.
• Lending to Non-Banking Financial Companies (NBFCs) saw a substantial increase of 32.2%.
• Large corporate credit growth accelerated to 16.6%.
• Retail credit growth stood at 15.8%, with vehicle loans increasing by 17.3%.
• Credit card credit growth, however, remained weak at 1.9%.

Bernstein clarified that the headline 20% credit growth figure is partly influenced by changes in fortnightly reporting requirements implemented in December 2025. The underlying credit growth, based on bank disclosures, is estimated closer to 18%.

Evolving Competitive Landscape

Private sector banks (PVBs) are showing signs of regaining momentum, narrowing their loan growth gap with public sector banks (PSBs) to approximately 1 percentage point during the quarter. This shift allowed PVBs to gain loan market share.

• PVBs expanded their deposit growth advantage over PSBs to about 4 percentage points.
• PSBs increasingly relied on borrowings to support credit expansion due to weaker deposit mobilization.
• PSBs continued to outperform private banks in Net Interest Income (NII) growth by about 4 percentage points.
• This PSB outperformance was attributed to better margin performance and stronger growth in higher-yielding retail lending segments.
• PSBs also reported a sequential improvement in return on assets (RoA), while the top five private banks experienced a modest decline.

Stable Margins Amidst Expansion

The robust credit cycle has not negatively impacted bank margins. Fresh lending and term deposit rates have largely stabilized, further supported by a moderation in certificate of deposit rates, which has alleviated funding pressure.

The spread between fresh loan yields and term deposit rates remains higher than the corresponding spread in outstanding portfolios. This indicates that incremental loan growth continues to be margin-accretive for the sector.