Whalesbook
India's Credit Expansion: Navigating Growth Sustainability Through Enhanced Risk Management Amidst Shifting Loan Preferences
The Indian credit industry is demonstrating remarkable resilience and momentum, with total Assets Under Management (AUM) reaching ₹1.30 lakh crore as of December 2025, a 17% year-on-year increase. New loan issuances in the third quarter of fiscal year 2026 (Q3 FY26) surged by a significant 36% year-on-year to ₹20 lakh crore, signaling robust demand across consumer and business segments. This expansion is increasingly anchored by secured lending, which now represents 34% of new loan sourcing, up from 30% a year prior, driven substantially by gold and home loans.
The Secured Lending Ascent
Gold loans have emerged as a standout performer, recording a 48% year-on-year surge to ₹10.6 lakh crore in AUM, largely fueled by demand for small-ticket loans below ₹3 lakh. This growth is amplified by elevated gold prices, which allow borrowers to secure higher loan amounts against existing collateral without liquidating their assets. Home loans also posted steady growth, with AUM reaching ₹41 lakh crore. This segment is supported by public sector banks, which held a 47.33% market share in 2025, and a broadening demand base extending into Tier-2 and Tier-3 cities, which now constitute 64% of total home loan volumes. The overall home loan market is projected to reach USD 809.07 billion by 2031.
Unsecured Portfolios: A Mixed Outlook
Despite the gravitational pull towards secured assets, unsecured lending segments continue to expand. Personal loans saw an 11% year-on-year rise in AUM to ₹15.4 lakh crore, while consumer durable loans grew by 18%. Two-wheeler loans, primarily facilitated by Non-Banking Financial Companies (NBFCs), reached ₹1.8 lakh crore. Digital lending platforms and AI-driven underwriting are revolutionizing personal loan approvals, with fintech platforms disbursing over 11 crore loans cumulatively by mid-2026. However, credit card issuance has experienced a slight slowdown, despite increased average credit limits, indicating a more cautious approach in this segment. NBFCs continue to play a crucial role in unsecured lending, particularly in smaller ticket-size loans, though banks are gaining share in higher-ticket personal loans and showing improved asset quality in this segment.
Asset Quality Improvement
A significant positive development is the enhancement of asset quality, with net 30+ delinquency rates falling to 3.3% from 3.9% a year ago. This reduction signals healthier repayment behaviour across diverse loan portfolios, including auto and home loans. The shift towards secured assets and improved borrower discipline are key contributors to this trend.
Comparative & Macro Context
India's credit growth, currently around 12.8% year-on-year as of December 2025, is robust compared to many advanced economies. While India's credit-to-GDP ratio of approximately 93% is lower than many global peers, it suggests ample room for sustainable expansion. Macroeconomic factors like easing inflation and supportive government fiscal policies, including GST rate rationalization, are bolstering consumption and investment, thereby sustaining loan demand. Analyst reports anticipate continued credit growth in the range of 10-12% for FY2026, although some forecast a moderate slowdown to 9.7-10.3% due to factors like a high credit-to-deposit ratio and evolving regulatory frameworks.
Historical Perspective & Sustainability
India's credit market has experienced significant growth phases historically, such as the boom in the 2000s, which was driven by infrastructure lending and saw credit expansion of around 25% annually. While the current growth trajectory appears strong, past cycles have demonstrated the importance of managing leverage and asset quality. The current expansion, supported by digital transformation and policy initiatives, is seen by some as structurally healthier than previous cycles. However, the historical experience also highlights the need for vigilance against potential excesses, especially as credit-to-GDP ratios are still lower than developed economies, indicating room for growth but also a need for prudent expansion.
The Bear Case: Risk Management Imperative
Despite positive growth trends, the sustained pace of credit expansion necessitates careful risk management. Experian India's Country Managing Director, Manish Jain, emphasized that "responsible lending and timely data insights are key" to balancing growth and risk. While secured lending is robust, the increasing reliance on higher-ticket loans, the nuanced performance of unsecured segments, and the substantial growth in gold loans, which offer quick liquidity against collateral, signal a dynamic environment. Analysts caution that while asset quality has improved, factors such as normalizing credit costs, potential margin compression due to fluctuating interest rates, and the increasing prominence of NBFCs require close monitoring. The focus on NBFCs, their funding diversification, and regulatory compliance will be critical determinants of sustained performance. Furthermore, the possibility of increased non-performing assets, particularly in unsecured retail and microfinance segments, remains a concern for some analysts.
Future Outlook
Projections for the Indian banking sector suggest continued growth, with credit expansion expected around 12% for FY2026. Banks are anticipated to benefit from infrastructure spending and sustained domestic demand. While profitability is expected to remain robust, a slight softening is projected due to moderating margin pressures and normalizing credit costs. The rise of digital lending and NBFCs' expansion, especially in retail and specialized segments like gold loans, will continue to shape the market, with analysts forecasting NBFCs to grow faster than banks.