India's banking sector has achieved a significant milestone with credit growth reaching 20% year-on-year in the June 2026 quarter, marking the highest growth rate in more than four years according to Bernstein research. The Reserve Bank of India (RBI) confirmed in its latest monthly bulletin that bank credit continued to record robust growth across major sectors in June 2026, with the credit growth momentum remaining broad-based across segments. Based on bank disclosures, Bernstein estimates the underlying credit growth at around 18% when adjusted for reporting changes introduced in December 2025. As per Bernstein analysts Pranav Gundlapalle, Ishan Mittal and Anirudh Gupta, the banking system's LDR at 82% in July 2026 remained close to decadal highs, reflecting the continued pressure on deposit mobilisation.
The credit growth acceleration has been particularly strong across multiple sectors, with agriculture credit showing robust expansion and industrial credit growth sustained by expansion in credit to large industries. Credit flow to the services sectors also strengthened, driven by non-banking financial companies (NBFCs), trade and commercial real estate. As per Bernstein, the sharpest acceleration has been visible in industrial and services lending, with recovery spreading across sectors led by large corporate borrowings and higher funding demand from NBFCs. Personal loans picked up in June, supported by housing loans and loans against gold jewellery, while NBFC credit continued to record double-digit growth across major sectors except industry. The firm noted that PVBs continued to gain ground on both loans and deposits, with stronger loan growth narrowing the gap with PSBs to 1 percentage point and better deposit mobilisation widening their deposit growth advantage to 4 percentage points.
The strong loan growth has outpaced deposit mobilisation, raising concerns over funding for banks despite improved deposit growth in recent months. Large corporate borrowings and higher funding demand from non-banking financial companies (NBFCs) were among the key drivers of the credit expansion. However, Bernstein reports that despite the high loan-to-deposit ratio, bank margins remained broadly stable with fresh lending and term-deposit rates largely stabilised. The firm noted that margin trends remained stable, supported by plateauing lending and deposit rates, easing CD funding conditions and margin-accretive incremental lending. As per the analysts, margin outlook remains stable, with deposit repricing largely behind us and any rate hikes likely to provide an incremental boost to NIMs, while asset quality remained benign with further improvement in already low credit costs.
Looking ahead, Bernstein expects the banking sector to maintain healthy growth in FY27, supported by favourable liquidity conditions and improving nominal credit growth. The brokerage has retained its FY27 loan-growth estimate at around 13-15% and expects net interest margins to remain broadly stable, with asset quality staying benign. As per the analysts, margin risks are easing with improving system liquidity, supporting stable credit costs and earnings resilience. However, Bernstein cautioned that potential policy tightening later in the year could moderate momentum, though the current macro backdrop remains broadly supportive. The report emphasised that India's financial sector appears to be in a sweet spot, with loan growth at an over-four-year high, margin risks easing, and asset quality continuing to be benign despite macro volatility.
