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Demand dips, focus shifts and credit growth slows

Key takeaways from the RBI’s release on loans: (1) Loan growth has slowed to ~10% yoy. (2) Growth for public banks was at 11% yoy, while it was 8% yoy for private banks. (3) We continue to see slower growth at both ends of the ticket size: smaller and larger ticket-sized loans. A combination of factors, including weak demand, greater focus on liabilities than assets and general cautiousness in specific sectors, is resulting in slower loan growth trends.

Further slowdown in growth trends; private banks lose market share

The latest release (1QFY26) from the RBI on segmental information shows: (1) Loan growth was at 10% yoy, with public banks at 11% yoy, while it was 8% for private banks (see Exhibit 1). Market share showed a reversal, with private banks losing market share to public banks (see Exhibit 2). (3) Ticket size growth (see Exhibit 3) shows a slowdown in the large ticket-size loans (>Rs250 mn ticket size) and smaller ticket-sized loans. (4) Growth in the household sector has slowed (see Exhibits 7-8) and also across products (demand, overdraft and cash credit). (5) Private banks and public banks have a relatively more granular portfolio than what we have seen in the previous corporate cycle (see Exhibits 10-12).

Demand outlook not showing signs of recovery in most segments except SME

Corporate India’s balance sheets remain strong, yet credit demand from capexled projects is subdued. Most incremental capex is focused on brownfield expansion, funded largely through internal accruals, reducing loan demand. Midand small-sized companies show healthy loan appetite. However, growth may be tempered by tariff uncertainties, prompting lenders to adopt a cautious stance. Volatile demand conditions are also making borrowers more prudent about capacity expansion. Retail loans continue to offer long-term growth potential. Housing loans, the largest retail segment, are expected to grow gradually. Auto loans are already well-penetrated, with growth tied to price and volume trends. Loans against property may grow slightly faster than housing loans but carry a higher risk. Unsecured loans—personal loans and credit cards—are recovering after a post-Covid slowdown, although growth will not match FY2022-24 levels.

Balancing NIM and growth will be a challenge in the near term

The two other challenges facing lenders have been low-cost deposit growth (CASA and retail deposits) and building a profitable book (higher NIM). Private banks have focused a lot more on deposits, while public banks have gained market share in specific products such as retail and have been slowly making gains even in the mid-corporate segment. The wide divergence in NIM between public and private banks but with a similar cost of deposits, negligible stress in balance sheet and a comfortable capital position imply that the near-term risk would be higher for private banks. The recent experience in building higheryielding portfolios by private banks, especially in segments such as unsecured loan books (microfinance and lower-income-segment-focused personal loans), has resulted in disproportionately higher credit costs. A shift in focus to secured loans implies profitability pressure, making it harder to build the right loan mix.

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