India’s banking sector has entered a phase of moderation in credit growth. Despite a steady economic backdrop and government emphasis on infrastructure, recent data from the Reserve Bank of India and market observations point toward muted corporate credit demand. At the same time, selective pockets in retail lending could provide some offset, supported by recent policy measures.
Corporate Capex: Optimism Meets Caution
The RBI’s projections indicate that private corporate capex could rise by over 21% to ₹2.67 lakh crore in FY26. On the surface, this suggests stronger investment intentions. However, as the SBI Chairman recently highlighted, much of this capex is being financed through internal accruals rather than bank borrowings. Healthy cash flows and conservative balance sheet management mean that India Inc. is less reliant on external debt. For banks, this translates into subdued incremental demand from the corporate sector, particularly among large firms that dominate overall capex cycles.
This divergence between capex growth and bank credit demand is further underscored by sectoral data. Credit growth to large industry remains weak, barely above 1% year-on-year in July 2025. In contrast, lending to micro and small enterprises has grown robustly at ~21% YoY, while medium industry saw ~15% growth. These numbers suggest that while smaller businesses are leaning on banks for expansion, larger corporates continue to self-fund investments.
Retail Lending: Pockets of Resilience
Retail loan growth, once the bedrock of India’s credit cycle, has also cooled. According to RBI data, retail credit rose 11.9% YoY in July 2025, down from ~14% a year earlier. The slowdown was most visible in vehicle loans (~9% YoY), credit cards (~6% YoY), and other personal loans (~8% YoY). Consumer durable loans even contracted slightly.
However, there are reasons to expect some near-term revival in household borrowing. The recent GST cut on consumer durables and automobiles is likely to stimulate demand in these categories, lowering effective costs for households. Banks, already flush with liquidity, could respond by easing terms in these segments. Housing loans, steady at ~10% growth, remain a stabilizing factor.
Services and NBFC Lending: Mixed Trends
Credit to the services sector grew 10.6% YoY in July 2025, aided by trade and commercial real estate lending. Yet, lending to NBFCs—historically a significant channel of credit intermediation—remains subdued at ~3% growth YoY. Despite the RBI lowering risk weights, banks remain cautious, reflecting both regulatory scrutiny and risk perceptions around NBFC balance sheets.
Outlook for Credit Growth
The combined picture is one of divergence. On one side, corporate India is investing more, but largely without bank financing. On the other, retail loan momentum has weakened, though policy support (such as GST cuts) could revive activity in specific consumption-linked categories. Services and SME lending continue to provide steady, if unspectacular, growth.
For investors, this suggests that aggregate credit growth may remain in single digits to low teens over the next few quarters. Banks with a higher skew toward retail and SME lending are better positioned, while those relying on large corporate loan growth could face sluggish demand. Margin pressure, already visible in Q1 FY26 results, may persist.
Conclusion
The Indian credit cycle is not stalling, but it is shifting gears. Growth is increasingly being driven by smaller enterprises and selective retail categories, rather than large corporates. Investors should expect a period of muted overall loan growth, punctuated by bright spots in consumer-driven segments. As ever, banks with diversified loan books and prudent risk management are likely to outperform in this environment.