Credit growth in India has accelerated sharply in FY26, led by robust lending to micro, small and medium enterprises (MSMEs), although risks from global and domestic headwinds could moderate momentum in the coming year, according to a report by Yes Bank.
Total credit flows rose 61 per cent year-to-date to Rs 25.1 tn, nearly matching deposit mobilisation of Rs 26.1 tn, which grew at a slower 21 per cent pace, the bank said in its latest “Credit Outlook” report.
The surge has been driven by strong demand across retail, MSME and infrastructure segments, with MSMEs emerging as a key pillar of industrial credit recovery. MSMEs now account for nearly one-third of industrial lending and have been the strongest contributors to loan growth within the sector in FY26.
Micro and small enterprises alone added Rs 2.38 tn in incremental credit during the period, while medium enterprises contributed Rs 630 bn, reflecting broad-based expansion within the segment.
The report attributes the strong MSME credit uptake to policy support, including credit guarantee schemes and an enhanced definition of MSMEs, which has widened eligibility and improved access to formal financing.
“MSME lending is driving industrial credit recovery, outpacing credit growth to large businesses,” the report noted, adding that credit expansion has been concentrated in micro and small firms, indicating deeper financial inclusion.
The broader credit environment has also been supported by monetary easing, liquidity measures and tax-related reforms that have boosted household incomes and demand. Personal loans remain the largest component of credit growth, with their share rising from 29 per cent to 33 per cent in recent years.
Within retail lending, vehicle loans have overtaken housing loans as the primary growth driver since the third quarter of FY26, while secured lending has gained traction over unsecured credit following tighter risk assessments by lenders.
However, the rapid expansion in credit relative to deposits has tightened liquidity conditions in the banking system. The credit-deposit ratio has risen to 82.4 per cent, its highest level since FY15, signalling increasing pressure on funding.
Banks have responded by stepping up reliance on certificates of deposit, pushing up funding costs and partially offsetting the benefits of an easier monetary policy stance, the report said.
While industrial credit has rebounded after a subdued FY25, lending patterns suggest a shift in corporate behaviour. Project finance has shown signs of improvement, but working capital loans have contracted, raising questions about the sustainability of private investment demand.
Infrastructure lending has also strengthened, supported by the government’s capital expenditure push, although construction activity remains weak amid a slow recovery in private sector investment.
Looking ahead, Yes Bank cautioned that the outlook for FY27 could be more challenging. Credit growth is expected to slow from the current pace of over 14 per cent, as several supportive factors begin to fade.
Rising geopolitical tensions in West Asia could weigh on domestic growth through higher oil prices and weaker export demand, while elevated food inflation may erode real wages and dampen discretionary spending.
For MSMEs, these pressures could translate into mixed credit dynamics. Higher input costs and supply chain disruptions may increase demand for working capital loans, but weaker economic activity could limit overall borrowing appetite.
On the funding side, deposit growth could see some improvement if households cut discretionary spending, potentially easing liquidity pressures and bringing down the elevated credit-deposit ratio.
“Overall, we expect credit growth to slow in FY27,” the report said, highlighting the interplay between global risks, domestic demand conditions and financial sector liquidity as key determinants of the trajectory ahead. |
