Weaker credit growth across the country’s top three private banks—Axis Bank reported its Q1 earnings on 17 July—suggests a broader trend of lender caution and moderating retail demand, especially in housing and auto loans. While successive rate cuts and benign inflation are expected to support consumption-led offtake, private capex and corporate credit appetite remain subdued, weighing on banks' core loan books.

System credit has been slowing down since the second half of FY25 due to a broader dip in consumption, particularly in geographies beyond tier-I cities. The deceleration has also been reflected in weaker passenger vehicle sales and subdued earnings by fast-moving consumer goods (FMCG) companies in H2FY25.

While FY26 has begun to show early signs of a revival in consumption, credit demand, apart from segments like personal loans, credit cards, and MSME lending, remains muted. RBI data shows that year-on-year system credit growth softened from 14-16% in the year-ago quarter to 11-13% in H2FY25, and further to about 9-11% in Q1FY26.

“Both monetary policy and fiscal policy implications are there to support the credit growth and we do expect that to pick up momentum, both consumption spending and credit growth with the festival cycle beginning. So, we'll have to wait and see," HDFC Bank chief financial officer Srinivasan Vaidyanathan said during the post-earnings media call.

Cautious credit expansion

Against this backdrop, HDFC Bank and ICICI Bank's June quarter results offer a snapshot of how private lenders are navigating this transitional phase.

The country’s largest private sector lender, HDFC Bank, has been consciously moderating loan growth to bring its credit-deposit (CD) ratio closer to pre-merger levels. The ratio declined to 95.1% in Q1FY26 from 96.5% in Q4FY25, improving by 140 basis points sequentially. The bank had previously said it expects loan growth to align with the broader industry in FY26 before outpacing it in FY27, setting up for market share gains from that point.

“(HDFC) Bank expects a pick-up in growth from increased consumption on the back of fiscal and monetary stimulus in the form of tax cuts from the budget, recent interest rate cuts, an upcoming festive season and a declining inflation. This is expected to drive growth across rural, urban, MSME and corporate loan segments," Bernstein Research said in a post-earnings note.

HDFC Bank’s gross advances rose 6.7% year-on-year to ₹26.5 trillion as of 30 June, led by 8.1% growth in retail loans, 17.1% in SME loans, and a modest 1.7% uptick in corporate and wholesale loans. Overseas loans made up 1.7% of total advances.

ICICI Bank, in comparison, reported stronger domestic credit growth of 12% year-on-year to ₹13.3 trillion. Growth was led by a 29.7% rise in business banking loans, while retail and corporate loans rose 6.9% and 7.5%, respectively.

The bank said its business banking portfolio is expected to remain a key growth driver in the near to medium term. With asset quality holding steady in the personal loan and credit card books, ICICI Bank is looking to “do more" in these segments by leveraging distribution and tapping rising demand.

HDFC Bank, meanwhile, pointed to buoyant MSME credit demand, attributing it to front-loading of exports amid potential tariff risks. While the private capex cycle remains weak, the bank said it is selectively participating in working capital loans.

In the year-ago first quarter, HDFC Bank's gross advances grew 52.6% on-year (due to a low base on account of the merger of erstwhile parent HDFC Ltd with HDFC Bank that came into effect on 1 July, 2023), but fell 0.8% from the previous three months. This growth slowed significantly to 7.3-7.6% on an annual basis and 2.5-2.6% on a sequential basis in the second half of the year.

ICICI Bank's domestic loans had grown 15.7% on-year and 3.3% on-quarter in the year-ago June quarter. The lender's pace of credit growth slowed to 15.1% and 13.9% in the third and fourth quarters of FY24, respectively, on an annual basis, and to 3.2% and 2.2% in Q3 and Q4, respectively, on a sequential basis.

CASA trends diverge

Both banks also reported strong deposit growth in Q1, with ICICI Bank’s deposits rising 12.8% and HDFC Bank’s up 16.2% year-on-year. Growth in low-cost current and savings account (CASA) deposits, however, diverged. ICICI Bank posted a 14% year-on-year rise in CASA deposits, compared with about 9% for HDFC Bank.

ICICI Bank said its deposit costs declined during the quarter, helped by a 25-basis-point savings account rate cut in April 2025, repricing of retail term deposits, and lower dependence on wholesale deposits.

HDFC Bank, on the other hand, has focused more on growing the overall quantum of deposits rather than the mix, in a bid to restore its CD ratio to pre-merger levels of around 87%. This strategy led to relatively slower CASA growth.

The bank is now deploying ground-level strategies to boost CASA, including targeting middle—and upper-middle-income customers and driving product-led engagement. It expects the impact of these efforts to begin reflecting in the second half of the year.

With core business growth muted and provisions elevated, profits for the two lenders during the quarter were driven by steady growth in non-interest income and controlled operating expenses. HDFC Bank’s net profit rose 12.2% on year and 3.1% on quarter to ₹18,160 crore in Q1 FY26. ICICI Bank’s profit after tax was up 15.5% on-year and 1.1% sequentially to ₹12,768 crore.

Following the earnings announcement on Saturday, shares of both HDFC Bank and ICICI Bank opened on a positive note on Monday. HDFC Bank’s shares traded 1.7% higher at ₹1,990.30 on the National Stock Exchange, while those of ICICI Bank were up 2.3% at ₹1,458.50 as of 1230pm (India time).

Margins under pressure

Net interest margins (NIMs) contracted for both banks in Q1FY26, as lending rates adjusted faster to the RBI’s rate cuts than deposit rates.

Management at both lenders said deposit repricing is still playing out and margin pressure could persist for at least another quarter.

Since February, the RBI has cumulatively cut the repo rate by 100 basis points, squeezing margins across the banking sector. While over 60% of floating-rate loans in the system are linked to an external benchmark that tracks the repo, deposits remain at fixed rates and reprice more gradually, putting temporary pressure on margins.

“We do expect the NIM to sort of compress a little more in the next quarter. After that, we will see how it goes," said Sandeep Batra, executive director, ICICI Bank, after announcing the bank’s Q1 results on Saturday.

ICICI Bank reported a NIM of 4.34%, down from 4.41% in Q4 and 4.36% a year ago. The bank also revised its NIM computation method—from number of days to number of months—to smooth quarterly volatility.

“The NIM trajectory (for ICICI Bank) was better than peers and was attributed to a reduction in SA (savings account) rates and wholesale deposits and there were no other one-offs driving the better than expected NIMs," Bernstein Research said.

Systematix Research added that ICICI Bank’s NIM included a 6–7 basis point benefit from interest on income tax refunds in Q1FY26, versus 2 bps in Q4FY25 and none a year earlier.

HDFC Bank’s core NIM declined to 3.35% from 3.46% in the previous quarter.

“The bank continues to gain deposit market share with average deposits growing 16% on year and 5% on quarter. The bank has fully passed on 50 bps of repo cut and only a tiny portion of the next 50 bps. This makes HDFC (Bank) the fastest in repricing EBLR loans followed by ICICI (Bank) while Axis (Bank) is the slowest," brokerage firm Nuvama said.

Asset quality and provisions

Both banks reported a seasonal uptick in agri-related slippages—common in Q1 and Q3—but said broader asset quality remained stable, including in unsecured portfolios.

ICICI Bank’s credit cost rose to around 50 bps from 27 bps in the previous quarter, driven by higher provisions. The bank does not expect credit costs to exceed current levels in coming quarters.

HDFC Bank’s provisions rose sharply, supported by over ₹9,000 crore in proceeds from the IPO of subsidiary HDB Financial. The funds were used to build floating and contingency buffers. As a result, credit cost increased to 56 bps from 48 bps sequentially, and 42 bps a year ago.

The bank said that while credit costs have been benign over the past few quarters, they are likely to revert to the mean at “some point."

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