Loan Growth Momentum Builds at Indian Banks In December Quarter

In the last quarter, Indian banks experienced stronger loan growth due to a resurgence in demand for credit amid the world’s fastest-growing major economy (India). HDFC Bank, Kotak Mahindra Bank and the Bank of Baroda were among the top institutions driving the increased volume of loans, which has been encouraged by increased consumer spending during the festive season and the government’s reduction in consumption taxes.

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Strengthening Post-Slowdown of the Mid-Year

Heavily regulated systemic credit volumes were subject to a significant decrease in the second half of 2025 (e.g., due to increased regulation), culminating in a low of approximately nine per cent in May. Systemic credit growth on a year-on-year basis began to recover at the end of June and rose from 11.10% in the March quarter to 11.50% for the November quarter and 11.40% currently. The Nifty Bank Index has appreciated approximately 10.00% since October, exceeding the Nifty 50, which was approximately a seven per cent increase. However, both indices experienced small declines on Monday.

Key Performers in Retail and Corporate

As of December, HDFC Bank's gross loans increased by 11.9% compared with previous quarter increases of 9.9% and 6.7%. The loans increased post-HDFC's acquisition of HDFC Bank. The second quarter results of Kotak Mahindra Bank show a 16% increase in net advances from a prior increase of 9% and are the highest in FY26. Bank of Baroda's total advances as of December increased by 14.6%, increasing from 11.9% in September and 12.6% in June. Smaller banks had even larger increases in gross advance growth rates; CSB Bank increased its gross advances by 29%; AU Small Finance Bank increased theirs by 24%.

Emerging Drivers: Secured Retail Segments

As new segments emerge, the retail space has been supported by consolidated lending for gold and vehicles, filling the void from the slowing of unsecured loans due to regulatory controls. The corporate credit business has re-emerged due to increased capital expenditures.

Sustainability and Risks

The Nifty Banking Index has been outperforming due to the current rotation in the banking sector, with the P/E ratio of approximately 18x suggesting some caution on valuations going forward. The Reserve Bank of India's neutral monetary stance and seasonal tailwinds may result in an increase in gross advance growth to 12-14% in fiscal year 2026. 

However, various global tariffs create export-linked risks. A sustained increase in retail secured loans creates more diversification across various segments in the banking industry and allows for additional stability.