New Delhi [India], July 5 (ANI): Industrial credit could emerge as the next growth driver for the Indian banking sector as government measures to boost manufacturing gather pace after a decade of modest performance, according to a recent research report by Anand Rathi.

The banking sector thematic report highlighted that industrial lending has strengthened after a prolonged period of slow growth and is showing renewed momentum.

Industrial credit, which constitutes approximately 21 per cent of total bank credit, has seen its year-on-year growth accelerate sharply from around 7 per cent in April 2025 to nearly 15 per cent in April 2026.

'The segment was a key driver of banking credit over FY04-14, compounding at rate of more than 20 per cent CAGR. However, it clocked a modest 4 per cent Compound Annual Growth Rate (CAGR) between FY14 and FY 25, as Indian corporates underwent an extended deleveraging cycle -- during which industrial credit as a per cent of industrial GDP compressed from approximately 79 per cent to approximately 50 per cent.

'With the government promoting manufacturing in India through subsidy and credit schemes, we believe, industrial credit could be new growth driver for Indian banks,' the report said.

The brokerage said, 'Banking sector continues to show healthy trends with accelerating credit growth, stable asset quality and return ratios.'

It added that Credit growth accelerated to approximately 17.7 per cent year-on-year in May 26 from 9.5 per cent in Jun 25, noting that 'industrial credit has shown material uptick and momentum in recent quarters.'

According to the report, 'Credit growth should sustain 14-15 per cent,' with 'new FCNR deposit rules to boost deposit growth by 150-200bps, which should lead to 14-15 per cent credit growth in FY27e. Industrial credit could be new demand driver given several govt policies to boost manufacturing in India.'

The report also said banks continue to maintain healthy balance sheets.

On the front of financial stability, the report characterized asset quality as 'healthy.' The gross slippage ratio - representing the rate at which good loans turn into bad ones- improved by approximately 9 basis points (bps) quarter-on-quarter and 35 bps year-on-year, standing at 0.97 per cent in Q4FY26.

Public Sector Banks emerged as top performers in this category. The report stated that PSBs remained 'best-in-class' with gross slippages staying below the 1 per cent mark and net slippages remaining near zero.

The report maintained a positive outlook for the sector, forecasting a steady growth and Return on Equity (RoE) trend of 14-15 per cent. 'Notably, valuations appear to be reasonable given these trends,' the report added. (ANI)