Credit as the Fuel for Growth

Executive Summary India’s credit market is under penetrated, with a credit-to-GDP ratio at ~90% , constraining its ability to sustain 8% growth.

The post-pandemic credit landscape remains skewed towards safer, consumption-led lending rather than productive investment.

Credit intermediation is shifting from banks to NBFCs and bond markets but limited depth and risk aversion restrict efficient capital allocation.

Bank lending capacity is tightening as deposit growth lags credit expansion , limiting the system’s ability to scale credit to required levels.

The corporate bond market is expanding but remains narrow, with high-rated issuers dominating.

. Reviewing the state of India’s banking sector with IMA India Forum members, Rajeswari Sengupta began with a question: Does India have enough fuel to grow at the pace it aspires to? By fuel, she meant credit. And by growth, she meant not the comfortable 6-7% that has become familiar, but the sustained 8-9% that would be required if India truly intends to become a developed economy within a generation. India, she noted, remains a credit-underpenetrated economy. The ratio of outstanding non-food bank credit to GDP has steadily declined over the past decade. Meanwhile, consumer credit growth averaged just ~11% annually between 2015 and 2025, well below the 18% required to achieve the said growth target. At precisely the moment when ambition has grown louder and the vocabulary of ‘ Viksit Bharat ’ has entered policy discourse, the intensity of credit in the economy has softened. Compared to advanced economies, where credit often exceeds GDP, India’s levels remain modest at ~90%. More importantly, credit is not growing materially faster than nominal GDP. If the economy is to accelerate, credit must expand ahead of output, not merely keep pace with it. That divergence is not yet visible.

Composition, Not Just Quantum India’s financial architecture has been undergoing a structural shift. For decades, intermediation was overwhelmingly bank-led, but a key constraint on credit expansion lies in the funding base itself. Deposit growth has lagged credit growth by 4-5% in the last decade, tightening the ability of banks to expand lending. In the last decade, the share of banks in total financial flows has declined from ~70% to ~53%, while non-bank financial companies and capital markets have grown, with their combined share rising to ~47%. On the surface, this appears healthy as diversified financial systems tend to be more resilient. The United States, for instance, relies far more on markets than on banks.

Yet India’s bond market remains narrow and conservative. At approximately $645 bn, it is a fraction of the country’s equity market, and nearly 90% of issuances are concentrated in highly rated paper. Moreover, Central and state government securities account for over 70% of the wider debt market, absorbing a substantial share of domestic capital. The market therefore finances the safest borrowers efficiently, but does little for those in the middle, where much of entrepreneurial growth resides. So, while intermediation has diversified, risk capital has not deepened proportionately.

A Boom in Demand On the demand side of credit, the transformation is even more striking. A decade ago, industrial credit drove banking balance sheets; today, it is retail lending, which has surged from ~19% of the total in 2015 to ~35% in 2025. Personal loans, housing finance and unsecured consumption credit have expanded rapidly, while the share of credit flowing to industry has fallen from ~40% to ~33%. The reasons are understandable. After years of stressed corporate balance sheets and the twin balance sheet crisis, banks became wary of large project lending. Retail loans are granular and statistically safer. They diversify risk across millions of borrowers. But India is not yet a high-income consumption economy. It still requires heavy investment in manufacturing capacity, infrastructure and productive assets. A banking system increasingly oriented toward consumption rather than production will struggle to enable long-term growth. Consumption can sustain growth for a time, particularly in a young and expanding population. But sustained 8-9% growth has historically required investment intensity, export expansion and capital formation. Without these, acceleration becomes difficult.

Whither Private Investment? Corporate balance sheets are healthier today than they were a decade ago, but this has not translated into an investment revival. Despite improved profitability and stronger cash positions, private capital spending remains below its mid-2000s peak. This is because credit availability alone cannot generate investment if demand remains weak.

Today, capacity utilisation rates across many sectors remains muted. Limited job creation has constrained household incomes and consumption, putting a cap on end-demand. Businesses therefore lacking sufficient demand visibility to invest at scale. While India’s strength in services exports, together with the growth of GCCs, provide some support, these sectors have not yet created employment at the scale required to drive broad-based demand and investment.

A Transformation in Household Savings India has long taken comfort in its household savings rate. But the composition of savings has shifted. Financial savings as a share of GDP has declined to ~5% of GDP (a 6-decade low) even as household borrowing has increased. Notably, nearly 50% of household borrowing is now directed towards unsecured personal loans, a pattern more consistent with distressed borrowing to sustain consumption than of asset creation.

In recent months, bank-credit growth has accelerated markedly. Over Apr-Jun 2026, for instance, it stood at ~18%. However, this was mainly driven by gold loans and lending to NBFCs, whose portfolios remain heavily retail-oriented. The reported increase in industrial borrowing largely reflects rising working-capital requirements in the face of higher input costs, rather than investment in new capacity. The headline numbers therefore do not yet indicate a broad-based revival in productive investment. Moreover, with deposit growth continuing to lag, banks may struggle to sustain this pace of credit expansion.

As financial savings decline relative to GDP, the reservoir from which credit is drawn tightens. In a predominantly domestically financed economy, insufficient savings might limit the supply of lendable funds and raise the cost of capital.

There is also a deeper issue to consider: stability versus growth. With the banking system having enduring a long period of stress, India’s regulators have understandably prioritised systemic stability in recent years, and policymakers remain cautious. Pension, insurance and Alternate Investment Funds (AIF) are also tightly regulated in terms of what they can invest in. Risk-taking is supervised closely. The financial system has, by global standards, avoided spectacular collapses. But there is a cost to excessive conservatism. A young, developing economy requires risk capital. If nearly all institutional flows are confined to highly rated instruments, the space for mid- tier expansion narrows.

Looking Ahead At per-capita income levels of ~$3,000 today, for India to even reach the lower bound of developed-economy income levels will require multiple doublings. Sustaining such a trajectory demands high investment rates and credit growth consistently above GDP growth. Without a revival in productive investment and a deepening of the credit ecosystem, ambition may outpace financial capacity. Yet there is no reason for pessimism. Banks are healthier than they were a decade ago. Non-performing assets have fallen. Capital markets are more active. Macroeconomic stability is not in question. The issue is not fragility but adequacy. The system is stable but stability alone does not generate acceleration.

The takeaways for CXOs are multi-fold. Funding sources must diversify. Balance sheets must remain strong in a system that rewards high credit quality. Liquidity conditions may tighten if domestic savings remain constrained. Regulatory signals matter enormously. And capital allocation decisions must reflect the shifting composition of demand in the economy. In the end, her intervention was less a critique than a caution. India is not out of fuel. But if the journey is as long and as ambitious as policymakers suggest, the tank may not be as full as the rhetoric implies.