(Image Source: Upstox)
Credit Expansion and Market Share Shift
Public sector banks finished 2025 with stronger loan growth than private banks, though overall credit appetite across the economy stayed spotty and banks faced funding squeeze. Total bank credit reached about ₹196.5 lakh crore by mid-December 2025, growing 11.7% from a year ago, showing steady but not runaway expansion. State-owned banks lifted their share of total advances to roughly 56.2% by end-March 2025, up from 55.5% the year before, marking a shift in who controls the lending market.
Their edge came from home loans and MSME credit, while business lending is beginning to pick up from weak levels earlier in the year. This growth happened even as banks struggled to keep pace with loan demand through deposits alone, pushing the credit-to-deposit ratio to about 81.2% by mid-December.
Three Segments Driving Growth
Retail lending stayed the strongest
Retail credit jumped about 17% year-on-year to around ₹144 lakh crore by September 2025, led by home, auto and personal loans. Home loans, now roughly ₹41 lakh crore and about 29% of all retail loans, grew around 12%, with state banks raising their piece of new home lending to about 47% from 42% a year back.
MSME lending turned around the most
Large state banks cut the time to approve MSME and working-capital loans to about 2-4 days, with India’s biggest lender getting some done in 48 hours. Using government guarantees, floating-rate pricing and centralized decision-making, these banks closed the old gap with private lenders and grabbed more MSME business.
Business lending is starting to recover
State banks now hold roughly 65% of corporate loans, with the largest one alone at about 22% market share. As the gap between bond yields and bank loan rates gets smaller, banks say they have more corporate loan requests, mostly for infrastructure and factory expansion.
Headwinds and Challenges
In a recent two-week stretch, loans grew by about ₹1.2 lakh crore while deposits rose only around ₹45,000 crore, forcing banks to tap wholesale funding like certificates of deposit and money markets. Credit demand splits unevenly across different parts of the market:
- Priority sector credit growth slowed to nearly 12% in FY25 from close to 17% the year before, though the total pool hit ₹67 lakh crore
- Banks tightened lending for unsecured borrowing, with personal loans and credit cards growing slower
- Farm credit showed mixed results with bad loans steadying after earlier trouble
- Service sector lending cooled from earlier gains
Capital Strength and Market Sentiment
Bad loans fell and capital got stronger, backing this phase of growth. Priority sector bad loans dropped to about 4% from 4.4%, while system-wide bad loans sit near 30-year lows. State banks keep capital ratios above 16%, leaving room to keep lending without raising new equity.
Stock markets noticed. The PSU bank index jumped about 31% this year, beating the main index for the fifth year straight and showing fresh interest in state lenders. Whether banks can keep this going depends on whether they can manage slower deposit growth, tighter funding and a more choosy credit cycle ahead.
