A lending boom with fewer borrowers

In today's episode, we will break down two important stories. First, we will look at 5 hidden stories from RBI's annual report, and then we talk about why the fortunes of the tyre industry changed last quarter.
Welcome to The Daily Brief show by Zerodha, where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I'm your host Krishna, and today is Wednesday 10th June.
Towards the end of last month, the RBI came out with its annual report. It's a 250-page monstrosity filled with reams of data, income statements, schedules, payment volume tables, footnotes on how gold is valued. Most people wouldn't read something this dense. We wouldn't either if we weren't trying to cover it for you. If you can brave it, however, this dry report is filled with fascinating nuggets about India, its economy, and its financial system. Some of its headline numbers have made the news such as the 2.86 lakh crore cheque the RBI handed over to the government. We won't repeat those for you. Here are 5 things you probably didn't see in the headlines, however. Between April and December last year, the amount banks lend to small businesses grew 23.5% on a year-on-year basis. The sector's outstanding credit to micro, small, and medium enterprises went up from 29.8 lakh crores to 36.8 lakh crores. A difference of 7 lakh crores in a single year. Now by all accounts, this was a huge boom year. But there's a twist. Even though the money being lent grew immensely, it went to a smaller set of borrowers. Now over the years, the number of micro businesses receiving financing was roughly flat. The sector's small and medium accounts meanwhile actually fell. At the very same time, however, the average borrower across categories had received more money. Now, why would these two trends play out at once? We have a few theories. For one, it's just harder to lend to a new small business.
Chances are, a new micro borrower has no credit history, no audited accounts and nothing to pledge. Giving them loans takes work. The effort of underwriting a 5 lakh rupee loan to an unknown kirana shop is not very different from that in giving a 5 crore rupee loan to an established company. The returns meanwhile are smaller. India's priority sector lending laws make banks direct a substantial amount of their lending to small firms. Their targets, however, are linked to the rupees they give out and not how many borrowers they serve. Together, these incentives push banks to reach for firms already on their books, handing them bigger checks, rather than finding new borrowers. Now, what could change this picture? A major bottleneck many borrowers face is a lack of collateral. This is perhaps why the RBI from April 2026 doubled the ceiling on collateral-free loans to small firms from 10 lakh rupees to 20 lakh rupees.
Ultimately, however, a firm with nothing to pledge is asking a bank to lend on trust. Now, do banks actually have that appetite? Now, that's a question worth looking at next year. See, banks have an odd convoluted relationship with money. They create money every time they give a loan, but are hemmed in by a series of statutory ratios. The specifics are too complex for what we are doing here. In a roundabout way, however, a bank's fortunes are tied to the rate at which they can procure money. Now, that has been tightening with time. The cheapest source of money for a bank is the deposits people make with them. Over much of the last year, however, banks were increasing their lending faster than they could grow their deposits. In FY 2025 to 2026, bank credit to the commercial sector went up by 15.9%.
Just one year ago, that rate was much lower at 10.9%.
Overall, bank credit grew by 17.1% through last year. Now, it isn't that people aren't making deposits. In fact, bank deposits too grew at a robust rate of 16.2% on a year-on-year basis. That's reasonably quick, but it's still almost a percentage point below the rate of credit expansion. Now, what does this gap actually mean? Banks won't run out of money. All money, with the exception of hard cash, ultimately sits somewhere in the banking system. If a bank can't grow the current and saving balances in its account, they can reach for something else. They could, for instance, try getting people to make fixed deposits with them. And if their lending outstrips that as well, they could go for wholesale funding, like certificates of deposits which are short-term IUs sold to mutual funds and insurers. Now, this is precisely what the report shows. In FY 2026, the banking sector's total issuances of certificates of deposits were at Rs. 13.5 lakh crore compared to Rs. 11.9 lakh crore one year ago. They were effectively scrambling to fund an unending surge in lending. Different sources of money, however, come with different costs. Wholesale money, for instance, is pricing, and reprices the instant rates move. In a crisis, it is the first to dry up, making it a part through which funding squeezes can curdle into failures. And over the year, the rates of this wholesale money grew as well. Now, there is a common story that newspapers tell you. The banks are staffed for money because people keep putting money in mutual funds. The report clarifies that there is simply nothing to this. If anything, bank fixed deposits and debt mutual funds are complementary, which is, they move together. Meanwhile, there is no relationship between deposits and equity funds at all. Over FY 2026, retail inflation averaged 2.1%.