Credit Trends: The Indian banking system is currently undergoing a significant structural shift. While retail loans remained the primary growth engine for banks for the past few years, the outlook for fiscal year 2026-27 appears to be changing dramatically. Amid recent economic data and the Reserve Bank’s hawkish stance, credit growth is shifting direction, fuelling debate in the market about whether banks’ future will now rest on large industrial investments rather than personal loans.
Stagnation in Retail Credit
After the unprecedented surge in unsecured personal loans and credit card spending over the past two years, a clear cooling-off period is now underway, primarily due to the Reserve Bank’s increase in risk weights and stringent underwriting standards adopted by banks. While the retail segment has not completely slowed down, it is now shifting from quantity to quality growth, with secured loans such as housing and auto loans still experiencing healthy growth of 14 to 16 percent.
However, banks have begun to exercise caution with small-ticket personal loans, and analysts believe that retail loans will now grow at a more sustainable pace of 12-14 percent instead of 18-20 percent, a positive sign for the long-term stability of the banking system.
Corporate Capex
The biggest piece of good news for the banking sector is coming from the corporate sector, where, after years of waiting, the private investment cycle appears to be fully active. Plans for significant investments in infrastructure sectors such as steel, cement, renewable energy, and data centers are now taking shape, leading to a surge in demand for large corporate loans.
The substantial allocation for infrastructure in the Union Budget 2026-27 has also opened new avenues for private companies. With Indian corporate balance sheets now in the cleanest and strongest position in the last decade, banks’ confidence in extending large loans has also increased significantly.
New Equation for Credit Growth
Total bank credit growth is projected to be between 11.5% and 13% for fiscal year 2026-27, and this growth pattern is expected to be more balanced than before. While the MSME segment is expected to grow by over 15% due to a new assessment model, demand for long-term loans from banks for infrastructure projects such as roads and railways is steadily increasing.
However, to maintain this pace of credit growth, the biggest challenge for banks will remain deposit mobilization, as deposit growth is still growing at a slower pace than loan demand, which could put pressure on banks’ margins.
How will this impact the banking sector
Overall, it can be said that 2026-27 will prove to be a year of rebalancing for the Indian banking sector, with the reckless pursuit of retail loans now subsiding and being replaced by corporate and infrastructure loans. This change is considered very good for the overall health of the banking system as it will diversify the loan portfolio and help in reducing future risks.
