After a period of sustained credit growth, some liquidity strains are beginning to emerge. Private sector banks, which are the primary drivers of credit growth, are already operating with loan-to-deposit ratios close to full deployment, while state banks retain excess liquidity but weaker credit impulse. In the absence of a proper interbank market or central bank funding backstop, this could limit future credit expansion.

Asset quality is the best it has been in well over a decade. Credit cycles in India notably manifest differently vs China. Indian regulators tolerate extreme impairment losses while simultaneously constraining balance sheet structure and margins through regulation. The result is a system with stable NIMs but volatile profitability, where stress is absorbed through credit costs rather than hidden via restructuring or margin compression. An impairment shock may be around the corner though as India is set to implement India expected credit loss provisioning standards in 2027.

The most notable feature of the Indian banking system is the extreme amount of wealth held in gold which represents a daunting alternative to deposit formation. By some measures, household gold holdings are larger than household deposits.