India’s private banks are growing again, but at a cost

**Akanksha** (0:04)
Today, we'll be talking about two interesting stories. The first is around Indian private banks, and the second is around Makhanas. Welcome back to The Daily Brief show by Zerodha, where we cut through the noise and help you understand what's actually happening in the most important stories from business and markets. I'm your host Akanksha, and today is Tuesday 11th of August. Let's start with the first story. India's private banks are growing again, but at a cost. We've been tracking India's private banking sector for over a year now, across more than four quarters of results. In QY F127, the four largest private banks reported some of their strongest loan growths over this period. At the same time, two of them reported their lowest margins since we started tracking them. To understand why both are happening together, we need to go back to about a year. Over the past year, a few themes kept coming up every time we looked at private bank results. The first was the corporate set out. For most of FI26, large Indian companies simply weren't borrowing much from banks. Corporate loan books grew in the low single digits, while other segments grew much faster. Part of this was because private capex remained weak, but pricing mattered too. Five years ago, a AAA rated company could borrow for a year through the bond market at a rate roughly 4.7 percent lower than what a bank would charge.
So companies that could raise money through bonds had little reason to borrow from banks. Banks instead relied on retail and SME loans for much of their loan growth. By March 2026, that gap had narrowed to about 1.5 percent. That made bank loans more competitive again, which is why we flagged in the last quarter that corporate borrowing from banks could make a comeback. The second was the deposit war. Through most of FY26, the problem wasn't finding people to lend to, it was finding enough money to lend. Banks needed deposits to fund all these loans, so they started offering higher interest rates to attract them. That made deposits more expensive for banks, and in turn, lending less profitable. Axis Banks Management on Deposit Growth question said, by quarter three, Axis was telling analysts that deposit and loan growth wouldn't converge for another 15 to 18 months. Things improved somewhat in the last quarter, but some of that could simply have been year-end seasonality. Whether the improvement would last was one of the questions we asked last quarter.
The other two concerns were more short-lived. One was unsecured lending. After RBI raised the risk weights on consumer credit in late 2023, banks slowed down personal loans and credit cards. By Q4, that pullback was already starting to ease, and we saw some activity there. The other was the West Asia crisis. Last quarter, bank management spent a fair bit of time discussing the risks around the Strait of Hormuz, with Axis even setting aside around 2000 crores as a precaution.
That risk never really materialized, and the provision remains unused. Other banks did talk about this, but they didn't give us a number like Axis did, and the issue barely came up this quarter. That brings us to this quarter. Instead of running through every bank's headline numbers one by one, we'll follow the few trends that actually explain what happened. By the end, you should have a pretty good picture of how all four banks did. Let's start with the biggest change. Corporate lending is back.
ICICI's domestic corporate book grew 18.5% year-on-year. Two quarters ago, it was growing at 9%, and two quarters before that, just 3.5%.
HDFC's corporate and wholesale book grew about 18%, while Axis maintained wholesale growth of 38%.
KOTAK's corporate book grew 15.5%.
Its credit substitute book, basically short-term corporate debt that the bank buys instead of giving out a regular loan grew 38% in a single quarter. This helped push overall loan growth to roughly 15-20% across four banks, among strongest we've seen since we started tracking them. But the more interesting bit is where the growth is coming from. Retail, which was doing much more of the work a year ago, is now growing slower than corporate lending at all four banks. ICICI's retail book grew 12%, HDFC's 7-8%, and Axis' is just at 8%.
In a year, the mix of loan growth has almost flipped. So, is India's long-awaited private KPEC cycle finally showing up? We wouldn't be so sure about that. ICICI's Anindya Banerjee said some of the corporate growth came because bond markets were less attractive this quarter.
Some was for working capital, and some ways simply have been companies borrowing to keep extra cash on hand. In other words, more bank borrowing doesn't necessarily mean companies are building new factories. KOTEC adds another wrinkle. Some of its growth came from buying companies short-term debt rather than giving them loans simply because it paid better. It also comes with a regular advantage. Buying this debt doesn't increase the base used to calculate the bank's priority sector lending requirement next year. Last quarter, we observed that margins, NIMs, had finally stopped falling.