Bank credit growth hits 20% in Q1FY27, highest in 4+ years; deposit growth lags, LDR near decade highs

Credit Growth Accelerates

Credit growth in India's banking system rose to around 20 per cent year-on-year in the June 2026 quarter, the highest in more than four years, according to a report by Bernstein. Deposit growth continued to lag, keeping the loan-to-deposit ratio (LDR) near decade-high levels.

The report, cited by ANI and The Hindu Business Line, said credit growth remained strong in July, with the recovery spread across sectors and led by industrial and services lending. Large corporate borrowings and higher funding demand from non-banking financial companies (NBFCs) were key drivers.

"Growth momentum improved meaningfully during the quarter, with system credit growth accelerating to ~20% YoY (or ~18% adjusted for reporting changes), while deposit growth continued to lag," Bernstein said.

Reporting Changes and Underlying Growth

The report noted that changes in fortnightly reporting requirements introduced in December 2025 contributed to the reported increase. Based on bank disclosures, Bernstein estimates underlying credit growth at around 18 per cent.

Industrial credit growth was supported by a sharp rise in borrowing by large companies, which account for nearly 70 per cent of industrial loans. Credit growth to micro, small and medium enterprises (MSMEs) also remained strong.

Services lending gained momentum, with bank credit to NBFCs growing by more than 30 per cent in recent months. Bernstein attributed this to higher bond-market rates, which have encouraged NBFCs to rely more on bank loans for funding.

Funding Concerns and Margins

The strong growth in loans outpaced deposit mobilisation, raising concerns over funding for banks. Although deposit growth has improved in recent months, it remains below credit growth, keeping the system-wide LDR close to decade-high levels.

Despite the high LDR, bank margins remained broadly stable. "Fresh lending and term-deposit rates have largely stabilized, while lower certificate of deposit rates and issuances have eased some pressure on funding costs," the report said. "The spread between fresh loan yields and TD rates remains higher than the spread embedded in the outstanding loan and deposit portfolios, indicating that incremental loan growth remains margin-accretive."

Healthy asset quality and improving credit costs have helped keep banking-sector profitability near decade-high levels.

Outlook

Bernstein expects the banking sector to maintain healthy growth in FY27, supported by favourable liquidity conditions and improving nominal credit growth. The report cautioned that possible policy tightening later in the year could slow the pace of expansion. Bernstein retained its FY27 loan-growth estimate at around 13-15 per cent and expects net interest margins to remain broadly stable, with asset quality staying benign.