Industrial credit could emerge as the next growth driver for the Indian banking sector as government measures to boost manufacturing gather pace after a decade of modest performance, according to a recent research report by Anand Rathi.
Industrial Lending Gains Momentum
The banking sector thematic report highlighted that industrial lending has strengthened after a prolonged period of slow growth and is showing renewed momentum. Industrial credit, which constitutes approximately 21% of total bank credit, has seen its year-on-year growth accelerate sharply from around 7% in April 2025 to nearly 15% in April 2026.
Historical Context and Future Outlook
According to the report, the segment was a key driver of banking credit over FY04-14, compounding at a rate of more than 20% CAGR. However, it clocked a modest 4% compound annual growth rate (CAGR) between FY14 and FY25, as Indian corporates underwent an extended deleveraging cycle. During this period, industrial credit as a percentage of industrial GDP compressed from approximately 79% to approximately 50%.
With the government promoting manufacturing in India through subsidy and credit schemes, the report states, "Industrial credit could be new growth driver for Indian banks."
Healthy Banking Sector Trends
The brokerage noted that the banking sector continues to show healthy trends with accelerating credit growth, stable asset quality, and return ratios. Credit growth accelerated to approximately 17.7% year-on-year in May 2026 from 9.5% in June 2025, with industrial credit showing material uptick and momentum in recent quarters.
According to the report, credit growth should sustain at 14-15%, supported by new FCNR deposit rules that are expected to boost deposit growth by 150-200 basis points. This should lead to 14-15% credit growth in FY27e. Industrial credit could be a new demand driver given several government policies to boost manufacturing in India.
Asset Quality and Profitability
The report also said banks continue to maintain healthy balance sheets. On the front of financial stability, asset quality was characterized as healthy. The gross slippage ratio—representing the rate at which good loans turn into bad ones—improved by approximately 9 basis points quarter-on-quarter and 35 basis points year-on-year, standing at 0.97% in Q4FY26.
Public sector banks emerged as top performers in this category. The report stated that PSBs remained "best-in-class" with gross slippages staying below the 1% mark and net slippages remaining near zero.
Positive Outlook for the Sector
The report maintained a positive outlook for the sector, forecasting steady growth and a return on equity (RoE) trend of 14-15%. "Notably, valuations appear to be reasonable given these trends," the report added.
