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If you also feel that people and big companies in the country are shying away from taking loans these days, then the latest data coming from the financial markets will completely change your thinking. There has been an unprecedented increase in the pace of distribution of bank loans in the country and it has reached its highest level in the last 10 years. It is a matter of relief that this boom is not limited to home loans or personal loans only, but the corporate world, MSME and service sector are also raising money from banks to expand their business.
Huge demand for loans everywhere, record growth of 17.7%
According to the recent report of the famous brokerage firm Motilal Oswal, by the end of May 2026, credit growth in the Indian banking system was recorded at 17.7 percent, which is the strongest figure in the last several years. According to the report, relaxation in GST rules, growth centric policies of the Reserve Bank (RBI) and all-round growth in the domestic economy are the main reasons behind this.
If we look at the figures, till April 2026:
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Retail Loan Segment: 16.4 percent increase
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Service Sector Loan: 17.0 percent increase
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Industry Loan: 16.5 percent increase
According to experts, till a few months ago the demand for loans in the industry sector was quite sluggish, but now big companies and MSMEs are requiring more funds for working capital. Apart from this, due to the cost of raising money from the bond market, corporates have also turned to banks. The demand for vehicle loans for vehicles is the fastest, which has seen a growth of 18 percent, although the pace of credit card loans is still a little slow.
Strong comeback of public sector banks (PSU Banks), market share increased to 53%
Till a few years ago, the private banks of the country were rapidly snatching away the market share of the government banks, but now the tables have turned. By March 2026, the share of public sector banks in the total banking loan distribution has increased to 53 percent. This is the second consecutive year when PSU banks have strengthened their share by defeating private giants.
However, the report estimates that in the coming time, private banks will make a comeback on the basis of corporate loans, business banking and MSME financing. According to Motilal Oswal, loan growth of private banks is expected to be 14.8 percent and that of government banks 12.8 percent in the financial year 2027.
Banks face ‘deposit crisis’, loan-to-deposit ratio crosses 83%
The speed of loans is like a bullet train, but the speed of deposit growth in banks is like a passenger train, which is the biggest challenge of the banking sector at present. While loan growth was 17.7 percent till May 31, 2026, deposit growth remained stuck at just 12.2 percent. As a result, the loan-to-deposit ratio (LDR) of the banking system has increased to about 83 percent, which is considered a very sensitive and high level.
However, RBI’s recent announcements on this front (relief in FCNR(B) deposits and foreign borrowings) may prove to be a game changer. With this, 40 to 50 billion dollars ($40-50 Billion) of foreign capital is expected to come into India, which will bring additional liquidity (deposits) of about Rs 4 to 4.5 lakh crore in the banking system and the pressure on banks to raise deposits will reduce significantly.
A huge jump of 15% in profits is possible in the next two years
On the global front, it has now become cheaper for banks to raise funds due to the easing of tensions in West Asia, strengthening of the rupee and falling government bond yields. Motilal Oswal estimates that between financial years 2026 and 2028, the total earnings of the banking sector may grow at a compounded rate of about 15 percent annually, the main source of which will be Net Interest Income (NII). Private banks can remain ahead in this profit race, whose annual growth in earnings is estimated at 21 percent, whereas for government banks, this estimate has been kept at 8 percent.
Brokerage’s view: There may be a big rise in these 4 banking stocks
In view of strong credit demand, improvement in liquidity position and better economic environment, Motilal Oswal in its report has expressed the greatest confidence on these four major stocks of the banking sector and has included them in its top-picks list:
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ICICI Bank
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HDFC Bank
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State Bank of India (SBI)
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AU Small Finance Bank
