Indian banks are strategically returning to unsecured lending after a period of regulatory-induced restraint, seeking to leverage higher-yielding products to counter mounting pressure on net interest margins. The shift represents a calculated move to revive growth in personal loans and credit cards, albeit with a more selective approach focused on premium, low-risk customers.

Rate Cut Impact on Banking Margins

The Reserve Bank of India has implemented significant monetary easing, cutting policy rates by a cumulative 125 basis points since February 2025, including a 25 basis point reduction in December 2025. This aggressive easing cycle has created margin pressure for banks as lending rates typically reset faster than deposit costs, prompting lenders to seek higher-yielding assets.

India Ratings & Research noted on 14 January that while deposit repricing is ongoing following the rate cuts, meaningful improvement in net interest margins is likely delayed until the end of FY26 or early FY27, aided by liquidity-easing measures.

Current Margin Performance

Despite rate pressures, major banks have demonstrated resilience in their third-quarter FY26 performance. HDFC Bank posted an 8 basis point sequential improvement to 3.35%, while ICICI Bank's net interest margin remained stable at 4.30%. Lenders have guided that margins are likely to remain resilient in the March quarter, supported by lag in deposit repricing and rising share of low-cost current account and savings account deposits.

Strategic Portfolio Repositioning

Banks are emphasizing that current growth plans represent a departure from the aggressive expansion seen before RBI tightened rules in late 2023. The approach now centers on tighter underwriting, enhanced customer profiling, and selective ticket sizes. Several lenders have indicated during December-quarter earnings that they are prioritizing salaried and affluent customers, particularly for personal loans and credit cards.

ICICI Bank management expressed confidence in growing cards and personal loans portfolios from current levels despite intense competition. "We are quite positive on what we are underwriting and it's a question of leveraging our franchise to grow these businesses," stated Anindya Banerjee, group chief financial officer at ICICI Bank, during analyst interactions on 17 January.

The bank attributed credit card portfolio decline to higher festive spending in the previous quarter, leading to significant repayments during the reporting period.

Targeted Customer Approach

Public-sector banks are implementing more targeted strategies. Punjab National Bank has launched a luxury metal credit card exclusively for customers with annual income above ₹30.00 lakh. For personal loans, banks are limiting fresh sourcing largely to salaried customers to safeguard credit quality.

RBL Bank reported that outstanding credit card dues shrank by approximately 1.00% sequentially in the quarter, with stress concentrated in older vintages. "The leading indicators are extremely encouraging, and we are comfortable with how the portfolio is behaving," noted Jaideep Iyer, head of strategy at RBL Bank, during the Q3 earnings call on 17 January. The bank plans to continue sourcing around 100,000 new cards per month, allowing portfolio growth of 10-15%.

Market Dynamics and Growth Outlook

The renewed focus follows a sharp slowdown in unsecured retail credit growth from November 2023, when RBI raised risk weights by 25% citing unprecedented growth and risk accumulation concerns. Personal loans grew 8.90% year-on-year to ₹16.30 trillion as of November 2025, slower than 11.20% the previous year. Credit card outstanding growth decelerated sharply to 2.40% year-on-year to ₹3.00 trillion in November 2025, from 18.10% a year earlier.

For the banking sector, the share of unsecured loans in gross advances declined for the second consecutive year to 24.50% as of March 2025, according to RBI's report on Trend and Progress of Banking in India 2024-25, dated 29 December.

Macquarie Research indicated in a 12 January note that early signs of acceleration are visible, projecting system loan growth could rise from around 12.00% to 13-13.50% by fiscal year-end, driven by retail and SME lending. Banks including Federal Bank, RBL Bank, YES Bank, and AU Small Finance Bank have expressed intentions to raise the share of higher-yielding unsecured loans to support margins, signaling a measured return to this critical revenue segment.

Indian banks are facing mounting pressure to mobilize deposits as their credit-to-deposit ratio reached an all-time high of 81.75% as of December 31, according to Reserve Bank of India data. This ratio indicates that banks lent ₹81.75 for every ₹100 of deposits mobilized, highlighting the growing imbalance between credit demand and deposit supply.

Record High Ratio Signals Funding Pressure

The elevated CD ratio reflects the challenges banks face in attracting deposits while meeting robust loan demand. Currently, banks must allocate significant portions of deposits to regulatory requirements before lending becomes possible.

While the RBI does not prescribe a specific cap for the CD ratio, it has urged lenders to maintain adequate liquidity buffers to meet unexpected withdrawals.

Deposit Growth Lags Behind Credit Expansion

The fundamental challenge stems from the divergent growth rates between credit and deposits. Bank credit demonstrated stronger momentum compared to deposit mobilization during the period.

This growth differential has created the current funding pressure, forcing banks to compete more aggressively for deposits.

Competitive Investment Environment

Banks face stiff competition from alternative investment options that offer more attractive returns. Small savings schemes currently provide 7.10% for three-year deposits, significantly higher than the 6.40-6.50% offered by banks. The challenge intensified after the RBI cut its policy rate by 125 basis points since February 2025, prompting lenders to reduce deposit rates further.

Alternative Funding Solutions

Banks are actively exploring alternative funding mechanisms to address the CD ratio challenge. They have requested the RBI to include bond borrowings in the CD ratio calculation, which would help bring the ratio below 80%. Currently, only deposits and certificates of deposit are considered for computing the ratio.

"To overcome this challenge, banks will have to explore alternative sources such as bond issuance to finance credit growth," said Saurabh Bhalerao, associate director and head of BFSI Research at Care Ratings. "The pace of investments in government securities has slowed, implying banks are deploying funds for lending."

Fresh investments in government securities dropped significantly to ₹1.87 lakh crore on a year-to-date basis until December, compared with ₹4.89 lakh crore in the same period a year earlier.

Future Outlook and Liquidity Support

Bank of Baroda chief economist Madan Sabnavis noted that "ideally, one should look at a broader denominator that includes borrowings and owned funds when calculating the CD ratio." He emphasized that a high CD ratio indicates efficient use of resources, as the number is derived after meeting regulatory requirements.

Banks have maintained nearly 8% higher Statutory Liquidity Ratio (SLR), mostly to comply with Liquidity Coverage Ratio regulations. Looking ahead, industry officials expect the ratio to moderate as deposit growth picks up, supported by substantial liquidity infusion by the RBI. Durable liquidity infusion has pushed reserve money growth to 9.40% (adjusted for CRR cut) as of December 2025, from 6.00% a year earlier.