Credit to trade sector and non-banking financial companies (NBFCs) is expected to remain among the fastest-growing segments of the banking system, driven by the formalisation of the economy, wider financial inclusion and stronger adoption of digital lending practices, Ashika Institutional Equities said in a report.
The brokerage said continued implementation of the Goods and Services Tax (GST), greater use of digital payments and increasing reliance on cash flow-based underwriting would support credit growth, while banks are likely to favour well-capitalised NBFCs with diversified funding sources and healthy asset quality.
Outstanding credit to the trade and NBFC segments combined rose to Rs 34.5 trillion in May 2026 from Rs 9.7 trillion in fiscal year 2018, underlining their growing contribution to overall banking system credit, the report said.
Credit to the wholesale and retail trade sector increased to Rs 13.8 trillion in fiscal year 2026 from Rs 4.7 trillion in fiscal year 2018, representing a compound annual growth rate of about 14.5 per cent. The segment has recorded mid-to-high teen growth since fiscal year 2022, outperforming several other lending categories.
Ashika attributed the sustained expansion to the formalisation of small businesses, growth in organised retail and rising working capital requirements. Wider adoption of GST, digital payment systems and formal banking channels has improved lenders' visibility into business cash flows, allowing banks to extend credit to borrowers that previously had limited access to formal financing.
"We expect trade credit to continue growing at a healthy pace, supported by further formalisation of the economy and increasing adoption of cash flow-based underwriting," the report said, adding that attractive lending yields and opportunities to deepen transaction banking relationships would keep the segment a priority for banks.
Bank lending to NBFCs also expanded significantly, rising to Rs 20.7 trillion in fiscal year 2026 from Rs 5 trillion in fiscal year 2018.
After slowing following liquidity stress in the sector, credit to NBFCs rebounded by 30 per cent in fiscal year 2023 and accelerated again to 26 per cent growth in fiscal year 2026. In May 2026, bank credit to NBFCs grew 33.7 per cent from a year earlier.
The report said the expansion reflects NBFCs' growing role in financing underserved borrowers and regions, particularly in vehicle finance, micro, small and medium enterprises (MSMEs), affordable housing and consumer lending.
It added that the relationship between banks and NBFCs has increasingly shifted from competition to partnership, with banks relying more on well-managed NBFCs to extend credit into segments where they have stronger distribution networks and customer reach. |
