India’s banking sector is strategically recalibrating its growth engines, pivoting towards the high-yield segments of unsecured retail credit, including personal loans and credit cards. This shift marks a cautious re-engagement with a portfolio that offers substantial returns, a critical manoeuvre in an environment where declining interest rates are compressing net interest margins (NIMs) and overall profitability. The move comes after a period of regulatory restraint, with banks now operating under the assumption that asset quality, particularly in retail segments, has largely stabilised, providing a conducive backdrop for this renewed focus.
The primary catalyst for this strategic pivot is the persistent pressure on banks’ Net Interest Margins. The Reserve Bank of India (RBI) has implemented a cumulative 125 basis points (bps) reduction in policy rates since February 2025, including a 25 bps cut in December of the same year. While these rate cuts are intended to stimulate economic activity, they directly impact bank profitability. Lending rates typically adjust downwards more rapidly than the cost of deposits, leading to a squeeze on the spread that banks earn. Data from the RBI’s "Report on Trend and Progress of Banking," dated December 29, 2025, revealed that banks’ median NIM moderated to 3.1% in fiscal year 2024-25, down from 3.3% in the preceding year. This moderation was observed across the board, although private sector banks generally maintained the highest margins, followed by foreign banks, with public sector banks exhibiting more uniform but comparatively lower margins. In such a scenario, unsecured loans, which command significantly higher interest rates due to their collateral-free nature and perceived higher risk, emerge as a crucial buffer to shore up profitability.
Industry analysts concur with this assessment. Prakash Agarwal, a partner at Geofin Capital, highlights the inherent attractiveness of unsecured products. "The overall growth is slightly weaker, and personal loans are one segment which also gives them a kicker on the yield side," Agarwal noted, adding that "banks actually make quite a bit of risk-adjusted profit compared to a normal loan. So, this remains a fairly attractive product." This higher-yielding characteristic is precisely what makes these portfolios appealing when traditional, lower-risk lending avenues, such as corporate or secured retail loans, offer diminishing returns. The December quarter (Q3FY26) saw some resilience in NIMs, with HDFC Bank reporting an 8-bps sequential improvement to 3.35% and ICICI Bank’s NIM holding steady at 4.3%. Banks generally guided that while the latest 25-bps RBI cut would be priced in, margins for the March quarter would likely remain resilient, supported by a lag in deposit repricing and a growing share of low-cost Current Account and Savings Account (CASA) deposits.
However, this renewed enthusiasm for unsecured lending is far from a return to the aggressive, broad-based expansion seen before regulatory interventions. Banks are keen to stress that their current growth plans are meticulously recalibrated around stringent underwriting standards, sophisticated customer profiling, and judicious ticket sizes. The emphasis is squarely on identifying and serving premium, low-risk customer segments, particularly salaried individuals and affluent clients, to mitigate the potential for delinquencies while preserving the attractive yields. This selective approach is crucial in an environment where competition for quality borrowers remains intense.
Leading private sector banks are at the forefront of this calibrated expansion. ICICI Bank’s management has indicated intentions to grow its credit card and personal loan portfolios, acknowledging the competitive landscape. Anindya Banerjee, Group Chief Financial Officer at ICICI Bank, conveyed to analysts in January 2026, "We are quite positive on what we are underwriting and it’s a question of leveraging our franchise to grow these businesses." The bank’s personal loan book saw a modest 2.4% year-on-year growth and a 1.7% sequential increase in the December quarter. Its credit card portfolio, however, experienced a decline of 3.5% year-on-year and 6.7% quarter-on-quarter, attributed primarily to significant repayments following higher festive spending in the preceding quarter. Similarly, RBL Bank reported a marginal sequential contraction of approximately 1% in outstanding credit card dues. The bank’s head of strategy, Jaideep Iyer, observed that stress in the segment was largely concentrated in older vintages, with newer portfolios exhibiting encouraging indicators. RBL Bank aims to maintain a steady monthly issuance of around 100,000 new cards, targeting a portfolio growth of 10-15%.
Public sector banks are also adopting a more targeted strategy. Punjab National Bank (PNB), for instance, has launched a luxury metal credit card, exclusively aimed at customers with an annual income exceeding ₹30 lakh. For personal loans, the focus remains predominantly on salaried customers, a segment perceived to offer better credit quality and repayment predictability. Other financial institutions, including Federal Bank, YES Bank, and AU Small Finance Bank, have openly expressed their intent to increase the proportion of higher-yielding unsecured loans within their overall portfolios to bolster margins. Prashant Kumar, Managing Director and CEO of YES Bank, affirmed the bank’s confidence in its ability to grow this book "in a very safe manner," citing robust policies and collection mechanisms.
The current cautious re-engagement follows a period of significant deceleration in unsecured retail credit growth, triggered by regulatory action in November 2023. At that time, the RBI, citing "unprecedented growth" and a proactive stance to avert a build-up of systemic risk, raised the risk weights on unsecured lending by 25%. This measure mandated banks to set aside more capital for such loans, effectively making them more expensive to issue and thus curbing their expansion. Consequently, the banking sector saw the share of unsecured loans in gross advances decline for the second consecutive year, reaching 24.5% by March 2025. This was a notable shift, especially as foreign banks, traditionally dominant in this segment, saw their share converge more closely with public and private sector banks.
The impact of the RBI’s intervention was immediately evident in the growth figures. Personal loans grew by 8.9% year-on-year to ₹16.3 trillion as of November 2025, a slower pace compared to the 11.2% recorded in the previous year. The slowdown was even more pronounced in credit card outstanding, which expanded by a mere 2.4% year-on-year to ₹3 trillion in November 2025, a sharp deceleration from the 18.1% growth observed a year prior. Despite this slowdown, experts like Prakash Agarwal note that while "there has been a bit of a challenge in the smaller ticket," the "larger ticket has held up pretty well," suggesting that higher-value, likely more affluent, unsecured borrowers continue to perform strongly.
Looking ahead, market analysts predict a broader acceleration in overall system loan growth. Macquarie Research, in a January 2026 note, forecasted that system loan growth could climb from approximately 12% to 13-13.5% by the end of the current fiscal year. This anticipated surge is expected to be primarily driven by a resurgence in retail and small-business lending, buoyed by what banks perceive as a more relaxed regulatory approach regarding loan-to-deposit ratios, which are no longer acting as a binding constraint. This improved liquidity environment, coupled with the ongoing pressure on NIMs, reinforces the strategic imperative for banks to selectively increase their exposure to higher-yielding unsecured credit. However, the path forward will necessitate a delicate balance between aggressive growth and prudent risk management, requiring banks to leverage advanced analytics, robust credit scoring models, and proactive collection strategies to navigate the evolving dynamics of India’s consumer credit market. The ability to precisely identify and serve creditworthy segments will be paramount for banks seeking to bolster profitability without compromising asset quality in the coming fiscal cycles.
