India’s banking sector saw a sharp acceleration in credit growth in FY26, driven primarily by retail and MSME segments, even as deposit mobilisation struggled to keep pace, signalling emerging funding pressures for lenders.
Credit growth rose 61% year-to-date in FY26, broadly aligning with deposit expansion and pushing the credit-deposit (C/D) ratio to a decade-high of 82.4%. However, the pace of deposit growth has been slowing since FY24, forcing banks to increasingly rely on certificates of deposit and other wholesale funding avenues, thereby elevating funding costs despite a relatively accommodative monetary policy environment.
Retail lending continues to anchor credit expansion, with personal loans emerging as the dominant segment. Their share in total credit has climbed from 29% to 33%, supported by tax relief measures and GST rationalisation. Within retail, vehicle loans have gained momentum, overtaking housing loans since the third quarter of FY26, reflecting a gradual shift towards secured lending portfolios.
On the industrial side, credit demand has staged a recovery, led by micro, small and medium enterprises (MSMEs). The segment now accounts for nearly one-third of total industrial credit, benefiting from policy support such as credit guarantee schemes and revised MSME classification norms.
Infrastructure financing has also picked up, aided by the government’s sustained capital expenditure push. While construction-related credit remains subdued, a rise in project finance during Q3FY26 alongside a contraction in working capital loans points to early, albeit cautious, signs of a revival in private sector investment.
Looking ahead to FY27, the credit outlook appears more challenging. Headwinds including elevated oil prices, softening export demand, waning GST-led tailwinds, and persistent food inflation could weigh on credit growth. On the liabilities side, deposit growth may improve if discretionary consumption moderates, potentially easing the elevated C/D ratio over time.
