- Credit expanded 13% YoY and 5% sequentially, outpacing most forecasts.
- Retail products—home, gold, and LAP—are the primary growth drivers.
- Deposit growth lagged, pushing loan‑to‑deposit ratios higher.
- PSU banks outperformed private peers; small finance banks are rebounding strongly.
- Top conviction picks include Kotak Mahindra, SBI, Federal, City Union, Ujjivan SFB, Bajaj Finance and Shriram Finance.
You missed the credit surge in Indian banks—now's the time to act.
Indian Banking Credit Growth Q3 FY26: The Momentum You Can’t Ignore
In the December quarter, the Indian banking system added credit at a 13% year‑on‑year clip and a 5% quarter‑on‑quarter rise. Public sector banks (PSUs) led the pack, delivering growth that eclipsed even the larger private houses. The surge was powered almost entirely by retail lending—home mortgages, loans against property (LAP) and gold loans—while secured financing for small‑ and medium‑size enterprises (SMEs) showed a clear revival. Unsecured consumer credit, especially from small finance banks (SFBs), also bounced back, indicating a broader appetite for borrowing across the economy.
Sector Trends: Retail Lending Surge and SME Funding Revival
Home loan disbursements have been buoyed by falling interest rates and renewed buyer confidence, while gold loans remain a low‑cost, high‑margin product for banks. Loans against property, which sit between unsecured and mortgage products, have attracted borrowers seeking flexible financing for business expansion or personal needs. On the SME front, banks have shifted toward secured lending—using inventory, receivables and equipment as collateral—thereby reducing credit‑risk exposure while still feeding the growth engine of India’s informal sector.
Competitor Landscape: How Kotak, SBI, Federal and NBFCs Stack Up
Kotak Mahindra Bank is seen as a top‑tier buy with a target of ₹515. Asset quality is improving; stress in micro‑finance and personal loans is easing, and credit‑card risk has stabilized. The bank expects a 17% compound annual growth rate (CAGR) in credit advances through FY28, driven by a healthier loan mix and modest repricing benefits.
State Bank of India (SBI) continues to dominate with a target of ₹1,280. Its credit growth outlook has been nudged up to 13‑15% as retail, SME and gold loan pipelines stay robust. SBI’s net interest margin (NIM) strategy aims to keep margins above 3% by expanding CASA (current account savings) balances and fine‑tuning deposit pricing.
Federal Bank surprised the market with a 12‑basis‑point NIM lift, thanks to balance‑sheet optimisation and a favorable cash‑reserve‑ratio (CRR) environment. The bank is trimming unsecured exposure while capitalising on strong CASA growth, positioning its return on assets (RoA) to climb to 1.3‑1.4% by FY28.
City Union Bank projects an 18% CAGR in credit, NII and earnings, anchored by MSME and gold loan growth. Stable NIMs are underpinned by deposit repricing and a disciplined asset‑liability management approach.
Ujjivan Small Finance Bank targets a ₹74 price, betting on improved MFI acquisitions, lower rejection rates and a gradual shift toward secured lending, which should curb funding costs and stabilise NIMs.
In the non‑banking financial company (NBFC) arena, Bajaj Finance and Shriram Finance are highlighted. Bajaj’s provisioning framework now includes a loss‑given‑default (LGD) floor, keeping credit costs at 165‑175 basis points and NIMs steady around 8.8%. Shriram expects NIMs of 8.5‑9% as funding costs fall and rating advantages improve, with asset quality holding firm in both consumer‑vehicle (CV) and MSME segments.
Historical Context: Credit Growth Cycles Post‑COVID
After the pandemic‑induced credit crunch of 2020‑21, Indian banks entered a recovery phase in FY22‑23, characterised by cautious underwriting and a focus on high‑quality retail assets. By FY24, the balance sheet was still thin on deposits, prompting a modest LDR (loan‑to‑deposit ratio) of about 75%. The current quarter’s LDR has risen above 80%, echoing the 2018‑19 pre‑pandemic expansion where credit growth outpaced deposits, eventually leading to tighter funding conditions. Learning from that cycle, banks are now prioritising CASA mobilisation to offset expensive bulk deposits, a strategy that should preserve margin stability.
Technical Corner: Decoding Loan‑to‑Deposit Ratio, CASA, and NIM
Loan‑to‑Deposit Ratio (LDR) measures how much of a bank’s deposits have been lent out. A higher LDR indicates aggressive credit expansion but can pressure funding costs if deposit growth lags. CASA represents low‑cost current‑account and savings‑account balances; a higher CASA share lowers the overall cost of funds, supporting healthier NIMs. Net Interest Margin (NIM) is the difference between interest earned on assets and interest paid on liabilities, expressed as a percentage of interest‑earning assets—essentially the core profitability gauge for lenders.
Investor Playbook: Bull and Bear Cases for Top Picks
Bull Case
- Retail loan demand sustains double‑digit growth, feeding higher NII (net interest income).
- Improved asset quality reduces provisioning, freeing cash flow for dividends and buybacks.
- CASA mobilisation keeps funding costs low, protecting NIMs even if policy rates rise.
- NBFCs like Bajaj and Shriram benefit from disciplined growth and strong rating‑linked funding.
Bear Case
- Deposit growth may stagnate further, pushing LDR to uncomfortable levels and forcing banks to tap expensive wholesale funding.
- Any resurgence in corporate defaults could erode asset quality, especially in micro‑finance and unsecured segments.
- Regulatory tightening on loan‑to‑value ratios for home and LAP products could throttle growth.
- NBFCs remain vulnerable to macro‑economic slowdown that could impair consumer‑vehicle and MSME repayments.
In summary, the Q3 FY26 credit surge presents a compelling, yet nuanced, opportunity. Banks that successfully balance aggressive lending with disciplined funding—particularly through CASA growth—are positioned to deliver outsized returns. Investors should weigh the upside of strong retail pipelines against the downside of a tightening deposit environment before committing capital.