The crucial policy question for India is not just whether bank credit is expanding quickly, but how much of the additional lending is creating productive capital rather than funding consumption or working-capital needs. The quality and composition of credit growth matter as much as its overall pace.

With credit growth increasingly focused on working capital and consumption lending, policymakers could consider measures to incentivise banks to lend for capacity creation and project finance. Such lending can generate employment both during the investment phase and once the newly created capacity begins operating. Greater credit flows to productive activities and employment-intensive businesses can support sustained, broad-based economic growth.

At the same time, a shift in bank credit away from capital-intensive sectors would require market-based sources of funding for long-gestation projects. This transition could face challenges amid persistent global financial uncertainty and its implications for domestic financial conditions. Strengthening the connection between credit expansion, capital formation and employment is therefore important to sustaining growth. 

India’s recent GDP figures provide the backdrop to this question. Real GDP is estimated to have grown 7.8% year-on-year in the first quarter of 2026–27, with gross fixed capital formation and exports expanding 11.9% and 12.0%, respectively. Both grew faster than the economy as a whole.

The rise in investment is particularly encouraging and suggests that India’s investment cycle may be gaining momentum. However, policymakers need to examine whether this investment is reaching firms and sectors capable of translating it into productive capacity and sustained employment. 

Credit Composition
Banks are not passive intermediaries or merely sources of money. Their allocation of credit has significant implications for the economy. The relative growth of working-capital and term loans provides an important perspective on how they assess and meet borrowers’ financing requirements.

According to the RBI’s Quarterly Basic Statistical Return on Credit by Scheduled Commercial Banks for June 2026, overall bank lending grew 16.5% year-on-year at end-June, while credit to the private corporate sector rose 21.1%.

Both working-capital and term loans recorded strong growth, but working-capital lending expanded faster, at 18.0%, compared with 13.4% in the previous period. Term loans, which accounted for 64.1% of total bank credit, grew 15.4% in June 2026. 

The sectoral composition of lending also warrants attention. The RBI’s June 2026 Financial Stability Report showed an acceleration in credit growth across agriculture, industry, services and personal loans, indicating strengthening demand. This was accompanied, however, by a decline in industry’s share of bank credit and an increase in the shares of services and personal loans.

The decomposition of credit growth suggests that services and personal loans gradually became the largest components of incremental bank credit over the reference period. This shift was particularly evident among public sector banks. By March 2026, personal loans contributed 6.0 percentage points to their year-on-year credit growth and services contributed 4.5 percentage points, compared with 1.9 percentage points for industry. 

Personal lending, which includes both unsecured and collateral-backed credit, meets a variety of retail borrowers’ financial needs. Within this category, the rapid expansion of gold-backed lending presents a particularly sharp contrast with industrial credit.

Data in the RBI’s August 2026 Bulletin show that loans against gold and jewellery grew 16.1% during the financial year so far, compared with 4.1% growth in credit to industry. The year-on-year divergence was sharper: industrial credit grew 19.2%, while loans against gold and jewellery surged 93.8%.

The rapid growth in gold-backed lending, coinciding with a sharp rise in gold prices, raises the possibility that borrowers are refinancing or topping up existing loans against the same collateral at higher valuations. Although these loans are secured, a sharp correction in gold prices could erode lenders’ collateral cushion and increase their exposure to risk. 

Investment Link
These distinctions matter because not all credit contributes equally to long-term economic growth. Working-capital lending finances inventories, receivables and short-term operating requirements, helping enterprises maintain and use their existing productive capacity.

Term lending for new factories, machinery, infrastructure, technology and other productive assets can expand that capacity. Its contribution extends beyond financing current operations to supporting the assets needed for future production.

Consumption-oriented lending is also important in sustaining demand and household expenditure. However, it largely finances current expenses rather than future productive capacity. If India is entering a stronger investment cycle, the quality and allocation of bank credit become increasingly important. 

Rupee depreciation adds another dimension. As Indian products become relatively cheaper in international markets, the ability to strengthen export competitiveness depends on the timely completion of projects. Financing new capacity is therefore relevant to firms’ ability to respond to these opportunities.

If banks become excessively risk-averse and restrict lending primarily to short-term working-capital requirements, borrowers could struggle to complete the productive cycle with new capacity. This could also weaken future credit demand and investment opportunities for banks, with adverse implications for production and economic growth. 

A stronger orientation towards investment lending could reinforce the connection between credit expansion, capital formation, employment generation and sustainable economic growth. The test is not simply whether banks are lending more, but whether that lending is helping build the productive capacity on which future growth depends.

The authors’ views are personal.