India’s banking system witnessed a sharp uptick in credit and deposit growth in March 2026, supported by strong year-end activity and rising corporate preference for bank funding, even as margin pressures and liquidity volatility persisted, according to a sector update by Anand Rathi Research.
Total bank credit expanded by 17.1 per cent year-on-year to Rs 213.6 trillion in March 2026, marking a significant acceleration compared to earlier months. On a sequential basis, credit grew 2.9 per cent, indicating strong momentum at the close of the financial year. Deposit mobilisation also improved meaningfully, helping moderate the credit-deposit (CD) ratio to 81.4 per cent. Banks supplemented funding through increased certificate of deposit (CD) issuances, reflecting tighter liquidity conditions and the need to bridge funding gaps.
Broad-Based Credit Expansion
Credit growth was broad-based across sectors, with services emerging as the fastest-growing segment, expanding 19 per cent year-on-year — the highest pace in nearly two years — driven primarily by lending to non-banking financial companies (NBFCs) and trade.
Industrial credit also remained robust, growing 17.8 per cent year-on-year, led by strong demand from micro, small and medium enterprises (MSMEs) as well as sectors such as engineering and metals. Infrastructure credit rose at a comparatively moderate pace of 9.5 per cent.
Retail lending continued to be a key growth engine, with personal loans rising 16.2 per cent year-on-year, supported by sustained demand for vehicle and gold loans. Agriculture credit also saw a notable uptick, growing 15.7 per cent — its fastest pace since September 2024.
Within sub-segments, gold loans stood out with an exceptional surge of over 123 per cent year-on-year, while vehicle loans grew 18.6 per cent. Credit to NBFCs expanded sharply by over 26 per cent, underlining their role as a key conduit for credit transmission in the economy. Sectorally, lending to petroleum, engineering and metals sectors recorded strong double-digit growth, while segments such as telecommunications and railways saw contraction, highlighting uneven sectoral trends.
Margins Under Pressure
Despite strong credit growth, banks faced pressure on net interest margins (NIMs), which edged down to 2.37 per cent in March from 2.38 per cent in the previous month. Over the past year, lending rates have softened while deposit rates have remained relatively sticky, compressing spreads. The competition for deposits has intensified, with banks increasingly relying on higher-cost term deposits to support lending growth. This shift is expected to continue, potentially weighing further on margins in the near term.
Liquidity Conditions Remain Volatile
Banking system liquidity remained volatile during the period, influenced by advance tax outflows, GST-related payments and foreign exchange interventions by the Reserve Bank of India. However, liquidity conditions are expected to improve with increased government spending and central bank support, including open market operations (OMOs). Revised liquidity coverage ratio (LCR) norms, effective April 2026, may introduce some tightening in funding conditions, although they are designed to be non-disruptive. Overall, system liquidity is expected to remain adequate.
Outlook for FY27
Looking ahead, credit growth is expected to remain healthy in FY27, albeit at a more moderate pace compared to the strong expansion seen in FY26. Key drivers are likely to include retail lending, MSME financing and infrastructure investment. However, deposit growth may lag slightly due to shifting household savings preferences, increasing reliance on market instruments and competition for funds. Elevated oil prices and tighter funding conditions remain key risks to watch. Analysts note that despite these challenges, the banking sector’s fundamentals remain strong, with healthy balance sheets and improved asset quality supporting continued expansion. |
