The most notable shift is in MSME credit, where public sector banks have re-established dominance over the past 6–9 months. Faster turnaround times of 2–4 days, wider use of credit guarantee-backed structures, and repo-linked pricing have materially narrowed the cost gap with private lenders.
This execution-led push, supported by a strong policy focus on MSME financing, is enabling PSU banks to gain market share, particularly in working capital and smaller business loans.
In contrast, private banks are remaining selective, preferring hybrid structures that combine partial guarantees with collateral, reflecting a sharper focus on risk-adjusted returns.
Unsecured business lending is undergoing a clear reset. Growth has moderated to 10–20% from the 30–40% levels seen in prior years, despite a sharp correction in pricing.
Stress pockets remain visible, particularly in agri-linked commodity businesses and among FMCG distributors facing elongated working capital cycles.
Collection intensity has increased, recovery costs have risen, and borrower behaviour has turned more tactical, prompting lenders to tighten underwriting standards and recalibrate tenors.
Housing and real estate lending continues to show resilience. While growth has cooled from peak levels, disbursement momentum has improved, led by large developers and redevelopment projects.
Stress among smaller developers is visible but remains contained and non-systemic. PSU banks are regaining relevance in home loans, aided by competitive pricing, faster processing, and normalised distribution commissions, driving traction in Tier-2 and Tier-3 markets. Private lenders, meanwhile, continue to dominate premium and high-credit-score borrower segments.
In retail unsecured products, early signs of stabilisation are emerging. Personal loan and credit card segments are moving past peak stress, with early delinquencies stabilising, though overall delinquency levels remain elevated versus historical norms.
Growth remains quality-led, skewed towards existing customers, salaried profiles, and secured or pre-approved offerings, with lenders prioritising activation and spend quality over headline volumes.
Looking ahead, the credit cycle appears to be settling into a more sustainable, execution-driven phase. Systemic loan growth is expected to remain steady, supported by secured retail and PSU-led MSME lending, while unsecured business credit remains under scrutiny.
The medium-term opportunity favours lenders with strong execution capabilities, diversified growth levers, and consistent asset quality, as the sector balances growth ambitions with profitability and risk discipline.
ICICI Bank: Buy| Target Rs 1700
ICICI Bank continues to demonstrate structural strength through disciplined risk management, prudent underwriting, and a well-diversified loan book, supporting sustained balance sheet resilience and margin stability amid a changing rate environment.
Its focus on scalable growth in business banking and granular retail, backed by deep distribution and ongoing investments in technology, is driving operating efficiency and productivity gains, while controlled costs and conservative balance sheet management provide financial flexibility.
Recent developments further reinforce the franchise, with the successful market debut of ICICI Prudential Asset Management highlighting the value and scalability of group subsidiaries, and revisions to credit card fee structures reflecting a calibrated push to strengthen fee income and align pricing with evolving digital usage.
Together, these updates underscore ICICI Bank’s ability to enhance franchise value, diversify revenue streams, and maintain strong competitive relevance.
AU Small Finance Bank: Buy| Target Rs 1100
AU Small Finance Bank remains well-placed for sustained growth, supported by margin expansion, controlled credit costs, and improving operating efficiency.
The bank continues to deliver strong balance sheet momentum, with healthy traction across retail and commercial segments and an improving CASA mix.
Over FY25–28E, we expect a robust ~30% PAT CAGR, aided by margin improvement and normalization in credit costs. In 2QFY26, performance remained strong with NIMs up 5bp QoQ to 5.5% and PAT at ₹5.6b, underscoring resilient profitability and stable asset quality.
Management expects NIMs to improve further as deposit repricing benefits accrue. We also project FY27E RoA/RoE at 1.7%/16.7%, reflecting healthy return ratios.
(The author is Head of Research, Wealth Management, Motilal Oswal Financial Services Ltd)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)