Indian banks enter FY27 with credit growth at 4-year high, says Bernstein

India’s banking sector has entered FY27 on a stronger footing, with system credit growth accelerating to around 20% year-on-year in the June quarter, its highest level in more than four years, even as deposits continue to lag loan growth, according to a Bernstein report.

The report , titled ‘India Financials: State of the sector - Attractive aggregates, mixed competitive dynamics’ released on Tuesday, said the sharp recovery in credit has been broad-based, led by industrial and services lending, while asset quality has remained benign and margins have stayed broadly stable. Bernstein expects the sector to maintain healthy growth in FY27, with loan growth estimated at 13-15%.

It said the banking sector is currently in a "sweet spot", supported by strong loan growth, easing margin pressures and benign asset quality. However, the key debate has shifted towards competitive dynamics between private sector banks (PVBs) and public sector banks (PSBs).

Private banks regain ground

Private banks are showing signs of regaining momentum after a period of weaker growth relative to PSBs. Their loan growth gap with PSBs narrowed to around 1 percentage point during the quarter, helping them gain loan market share.

PVBs also widened their deposit growth advantage over PSBs to around 4 percentage points. In contrast, PSBs continued to rely more heavily on borrowings to support credit expansion because of weaker deposit mobilisation.

However, PSBs continued to outperform private banks on net interest income (NII) growth by around 4 percentage points. Bernstein attributed this to better margin performance and stronger growth in higher-yielding retail lending segments. PSBs also reported a sequential improvement in return on assets (RoA), while the top five private banks saw a modest decline.

Credit growth broad-based

The recovery in bank credit is not limited to a single segment. Industrial credit growth accelerated to 19.2% in June, while services credit grew 21.4%. Lending to NBFCs was particularly strong, growing 32.2%, while large corporate credit growth accelerated to 16.6%.

Retail credit growth remained comparatively moderate at 15.8%. Within retail, vehicle loans grew 17.3%, while credit card credit growth remained weak at 1.9%.

Bernstein noted that the headline 20% credit growth number is partly influenced by changes in fortnightly reporting requirements introduced in December 2025. Based on bank disclosures, it estimates underlying credit growth at closer to 18%.

Profitability remains near decade highs

The stronger credit cycle has so far not come at the expense of margins. Fresh lending and term deposit rates have largely plateaued, while moderation in certificate of deposit rates has eased funding pressure.

Bernstein said the spread between fresh loan yields and term deposit rates remains higher than the corresponding spread in outstanding portfolios, indicating that incremental loan growth is still margin-accretive. Sector net interest margins therefore remained broadly stable.

Asset quality has also remained healthy, with credit costs improving further from already low levels. The combination of stronger growth, stable margins and benign asset quality has kept banking sector profitability near decade highs.