India’s banking sector has demonstrated remarkable resilience and a significant shift in its lending dynamics, with bank credit expanding by a robust 7 percent to reach Rs 1,95,273 billion in the first eight months of the 2026 fiscal year. This impressive growth was not fueled by the traditional industrial giants but rather by a powerful surge from two often-underestimated segments: retail borrowers and the nation’s burgeoning Micro, Small, and Medium Enterprises (MSME). This trend signals a fundamental transformation in the country’s credit ecosystem, where individual consumer needs and small business aspirations have become the primary engines of financial momentum. The data reveals a clear pivot away from large-ticket corporate loans toward a more distributed and diversified credit portfolio, reflecting both a change in banking strategy and a vibrant undercurrent of economic activity at the grassroots level. This evolution underscores the increasing importance of household and small-scale entrepreneurial finance in sustaining India’s broader economic expansion.
A Paradigm Shift in Lending Portfolios
The composition of bank lending portfolios underwent a notable transformation, with retail loans emerging as the undisputed leader of the credit boom, now accounting for approximately one-third of all gross banking credit. Delving deeper into this trend, the growth was predominantly driven by secured lending categories, as consumers increasingly sought financing for significant life purchases. Housing and gold loans, in particular, constituted the largest share of new credit disbursed, indicating a strong appetite for asset creation among households. In sharp contrast, the expansion of unsecured loans, such as personal loans and credit card debt, experienced a marked slowdown. This deceleration was a direct consequence of proactive measures by the Reserve Bank of India, which implemented higher risk-weight regulations and encouraged tighter underwriting standards to curb potential systemic risks. Simultaneously, the MSME sector witnessed a phenomenal doubling of incremental credit, boosting its share of new lending from 17.7 percent to a commanding 32.5 percent within a year.
Public Sector Banks and Corporate Sector Divergence
Public sector banks (PSBs) were pivotal in orchestrating this credit expansion, particularly in their vigorous support for the MSME sector, which proved essential to the segment’s unprecedented growth. These state-owned lenders also led the charge in extending credit into rural and semi-urban areas, a move that corresponded with and likely stimulated a welcome pickup in rural consumer demand. This strategic push was accompanied by a significant improvement in the health of PSBs, as their gross non-performing assets had fallen to a healthier 2.5 percent by September 2025. This positive momentum in the retail and MSME spaces, however, stood in stark contrast to the trends observed in the corporate sector. Lending for high-value industrial projects contracted, pointing to subdued capital expenditure by large corporations. While the demand for working capital loans remained stable and lending to non-bank finance companies showed early signs of a revival, the overall outlook for large-scale industrial credit was cautious. Projections at the time had forecast continued momentum, estimating overall credit growth would be between 10.5 and 11 percent for FY26, with household credit expected to continue outpacing corporate credit.
