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* The MSME segment experienced higher demand with an increase in working capital requirements due to higher input costs. While private banks continue to garner higher market share among higher-ticket MSME and business banking loans, PSU banks are gaining incremental market share on the back of competitive pricing, CGTMSE-backed lending, extending the ECLGS 5.0 scheme, and improving TAT. ICICIBC, HDFCB, and SBIN remain the top players in this segment.

* The demand for unsecured business loans has picked up with increasing utilization of working capital limits, primarily served by private banks and NBFCs. Private banks remain cautious in personal loans with a focus on ETB customers, while NBFCs and fintech companies continue to remain aggressive.

* Following a bumper run in 2HFY26 for vehicle loans (both PV and CVs) post-GST rationalization, there has been some volume moderation, although demand remains healthy. PSBs continue to dominate the new PV space on the back of low pricing and higher DSA payouts. HDFCB and KMB are faring well in the HCV and MHCV segments, while AUBANK remains a strong player in the retail CV and PV segments.

* Housing loans are experiencing a slowdown on account of lower inventory, project completion delays owing to higher construction costs, and limited purchasing capacity. PSBs continue to dominate the HL space with lower pricing and higher DSA payout. The demand in LAP is relatively robust and is dominated by private banks and NBFCs. Top players: SBIN in HL; HDFCB, ICICIBC, and KMB in LAP.

* Asset quality has held up despite an inflationary environment; however, stretched working capital limits and higher input costs could have an adverse impact on asset quality going forward, especially on smaller-ticket-size borrowers with limited pricing power. Our top picks are HDFCB, ICICIBC, SBIN, and AUBANK

MSME lending: Stretched working capital driving higher demand

Our interaction with industry players suggests that the working capital cycles across sectors have started to stretch on account of rising input costs (+ 15-30%). The output of some industries was also affected by a labor shortage at the time of the West Bengal elections. Large private banks continue to garner a larger market share in higher-ticket-size loans on the back of better transaction banking facilities, tech capabilities, and cross-selling of liability products. However, PSU banks have gained traction in this segment recently on the back of competitive pricing, lending under the CGTMSE and ECLGS 5.0 schemes, and improved TAT, especially capturing market share from cooperative banks. Given the rising working capital utilization levels and working capital limits, large private banks with exposures to large industry players, which command better pricing power, are better placed compared to mid-size banks with exposures to smaller ticket sizes and NTB borrowers.

* ICICIBC and HDFCB, supported by their strong relationships, network, product mix, and sourcing avenues (both in-house and DSA), continue to be the major players in the segment. ICICIBC continues to have a competitive edge on the back of superior tech capabilities and offers better overdraft facilities.

* Among the PSBs, SBIN remains the most aggressive, offering competitive pricing, improved TAT, and lending under the CGTMSE scheme. Lending based on the CGTMSE scheme involves continuous monitoring of stock reports, cash flows, and debtor lists, reflecting strong underwriting practices.

* AXSB holds a significant market share among the smaller wholesale players in Surat's textile industry. These players are facing stretched working capital limits and are operating with reduced profit margins.

Valuation and view

* Our 1QFY27 channel check showcases resilience in the Indian economy, sustaining business momentum and maintaining asset quality despite the second-order impact of the West Asia crisis.

* Systemic bank credit growth is now tracking at 17.7% YoY, which is a decadal high, driven by strong demand in the MSME, retail, and corporate segments.

* High-ticket MSME/business banking, LAP, and CV loans shall be the growth drivers for private banks. In contrast, MSME, home loan, and auto loan growth shall be led by PSBs.

* Given the uncertain global macros and rising input costs, we remain cautious on the asset quality outcomes of mid-size banks with exposure in SBL and the retail CV segments.

* We continue to favor lenders with strong execution, liability franchise depth, and disciplined underwriting. ICICIBC and HDFCB remain our top private sector picks with a profitable growth trajectory alongside robust asset quality. SBIN is our preferred PSU pick for its all-round execution and healthy growth trajectory. Among the mid-size banks, AUBANK remains a preferred pick with industryleading growth, a granular asset book, and strong collection infrastructure.

* Our top picks are ICICIBC, HDFCB, SBIN, and AUBANK.

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