India's banking sector has reached a historic milestone with outstanding bank credit crossing the ₹200 lakh crore mark for the first time, driven by robust demand and supportive policy measures. The achievement reflects strengthening economic momentum and increased investment activity across key sectors.

Credit Growth Reaches Multi-Year High

Outstanding bank credit stood at ₹203.2 lakh crore at December-end, registering impressive 14.5% year-on-year growth according to Centre for Monitoring Indian Economy (CMIE) data. This growth rate matches levels last seen on July 12, 2024, indicating sustained momentum in credit expansion.

The year-to-date credit expansion of ₹20.78 lakh crore significantly exceeded the ₹13.18 lakh crore increase recorded in the corresponding period last year. At 11.4%, the YTD credit growth has already surpassed the 11% growth projected for FY26 by the Reserve Bank of India.

Investment Activity Drives Demand

Credit demand is receiving substantial support from increased investment activity, with investment proposals in the first nine months rising to ₹26.62 lakh crore from ₹23.62 lakh crore in the previous year. The growth is being attributed to GST reduction and more accommodative monetary policy measures that have spurred investment activity.

According to Saurabh Bhalerao, associate director and head of BFSI research at Care Ratings, "Credit growth is being driven largely by auto loans, which typically pick up at the end of the calendar year, along with demand from small and mid-sized companies, finance companies and the home loan segment."

Deposit Growth Maintains Steady Pace

Outstanding aggregate deposits reached ₹248.5 lakh crore, showing healthy growth across multiple timeframes. The deposit expansion provides adequate funding support for continued credit growth.

Policy Support and Market Dynamics

The strong credit performance comes after the RBI implemented significant policy measures, including a 50 basis point repo rate cut and a staggered 100 basis point reduction in cash reserve ratio. These measures were introduced after credit growth had fallen to a three-year low of 8.9% year-on-year in May.

Bank of Baroda noted in its report "Investment Climate in 9 Months-FY26" that "there has been a tendency for interest rates to also come down, which is expected to spur investment activity. Hence, the investment environment does appear to be positive in the present financial year."

Data Reporting Enhancement

The credit and deposit data was released following recent amendments to the Banking Regulations Act, 1949, allowing the RBI to publish numbers on the 15th and last day of each month instead of alternate Fridays. This change aims to reduce interpretational ambiguity in market analysis.

Analysts note that if current growth levels are sustained, credit expansion could surpass the 11.5-12.5% forecast by Care Ratings and the 10.7-11.5% projection by Icra, indicating strong momentum in India's banking sector.

Banking sector profitability is expected to remain robust in the third quarter, with falling deposit rates anticipated to offset recent policy rate cuts and support net interest margins. The Reserve Bank of India's strategic liquidity measures, combined with sustained credit demand, are positioning banks for stable performance despite ongoing challenges in deposit mobilization.

RBI's Liquidity Support Measures

The Reserve Bank of India's 100 basis point cash reserve ratio cut has been largely implemented during the third quarter, with significant impact on banking liquidity. The implementation details show substantial support for the sector:

This liquidity infusion is expected to ease funding pressures and support bank margins across the sector. One basis point represents a hundredth of a percentage point, making this a substantial monetary policy intervention.

Credit Growth Momentum

Early numbers released by banks indicate strong credit demand, with large lenders reporting growth rates above the banking system's overall performance. Key growth indicators include:

• System Credit Growth: 10-12% during the quarter
• Large Lender Performance: Above system average
• Annual Projection: Banking system credit growth expected to remain above 12% year-on-year this fiscal
• Growth Drivers: Mid-sized banks maintaining brisk pace

Analysts from Systematix Shares & Stocks, Siddharth Rajpurohit and Rishit Savla, noted that profitability is expected to improve due to sustained sequential advances growth, higher fee income, and lower credit costs.

Net Interest Margin Outlook

The net interest margin performance is expected to vary significantly across different banking institutions. Analyst Nitin Aggarwal from Motilal Oswal provided detailed projections:

The divergent outcomes reflect varying deposit cost structures and asset repricing cycles across different institutions.

Deposit Mobilization Challenges

Despite positive credit growth trends, the banking sector faces significant challenges in deposit mobilization. The loan-to-deposit ratio has reached concerning levels:

This high loan-to-deposit ratio presents systemic risks, as banks may need to either slow loan growth or increase deposit rates to improve deposit mobilization, both scenarios potentially impacting profitability.

Sector Growth Drivers

Anand Dama, head of BSFI research at Emkay Global Financial Services, highlighted specific sectors driving banking loan growth during the quarter:

• Fast-growing segments: MSMEs and mid-corporate lending
• Retail support: Gold loans and vehicle finance
• Overall impact: Sustained demand across multiple sectors

The combination of falling deposit rates, RBI's liquidity support measures, and robust credit demand across various sectors is expected to create a favorable environment for banking profitability in the third quarter, despite ongoing challenges in deposit mobilization.