System credit growth in India is showing clear signs of revival after a period of deceleration, according to a report by Motilal Oswal Financial Services. The brokerage said that policy and tax measures, combined with improving consumption demand, have helped lift lending activity, and it expects credit growth to remain robust through FY26 and FY27.
India credit growth shows early revival
As of 12 December 2025, system credit growth stood at 11.7% year‑on‑year, with year‑to‑date growth at 7.7%. That represents a recovery from the cycle low of 8.9% recorded in May 2025 and follows a sustained gain in momentum through the latter half of the year. Motilal Oswal noted that growth has remained above 10% since July 2025 and tracked above 11% in October and November.
The report attributes the pick‑up in lending largely to consumption‑led demand, which strengthened after recent goods and services tax reductions. In addition, the full 100 basis point cut to the Cash Reserve Ratio is now in place, and regulators have introduced other supportive measures. Together, these changes are expected to further encourage banks to expand credit in the coming months.
On its central forecast, Motilal Oswal expects system credit growth to remain around 12% year‑on‑year in FY26 and to improve to roughly 13% in FY27. Within its coverage universe, the brokerage expects large private sector banks to report quarter‑on‑quarter loan growth of roughly 3–4%, while mid‑sized lenders are likely to expand at a faster clip.
Deposit growth has been more stable. System deposits were growing at 9.7% year‑on‑year as of December 2025 and have broadly traded in a 9–10% range over the past year. Nonetheless, banks continue to face intense competition to mobilise low‑cost funding, which has kept margins under pressure.
Motilal Oswal expects ongoing repricing of term deposits to lead to a moderation in the cost of funds during the third and fourth quarters of FY26. That moderation should help offset part of the effect of the 25 basis point repo rate cut by the Reserve Bank of India, improving banks’ ability to pass on cheaper funding to borrowers while protecting net interest margins.
For corporates and households, a stabilising credit cycle can ease financing constraints and support spending and investment. The brokerage’s forecast of a sustained double‑digit lending growth rate implies a brighter outlook for demand in retail consumption, housing and small business credit segments, where most gains were observed.
Still, risks remain. Elevated competition for deposits, the timing of deposit repricing and the transmission of monetary easing into effective lending rates will shape the trajectory of margins and loan growth. Credit quality trends will also be watched closely, though the recent growth has been described as broad‑based rather than concentrated in higher‑risk pockets.
Overall, the Motilal Oswal report suggests that a mix of fiscal and monetary support—GST cuts, CRR easing and regulatory measures—has rekindled lending activity in India. If the trajectory holds, the banking system is likely to see stronger credit expansion across FY26 and into FY27, helping to underpin economic momentum.
Key Takeaways:
- India credit growth is expected to hold at about 12% year‑on‑year in FY26 and rise to nearly 13% in FY27, driven by consumption and policy support.
- System credit improved to 11.7% year‑on‑year as of 12 December 2025, recovering from a May low of 8.9%.
- Deposit growth has remained steady at about 9.7% while banks face elevated competition for low‑cost funding.
- Policy moves, including a full 100bp CRR cut and GST rate reductions, are likely to underpin further credit expansion.
