India Banks in Q3FY26: Retail & MSME Credit Strong, but Tight Spreads and High CD Ratio Bite

Credit demand stayed strong in Q3FY26, but faster reset in loan yields versus deposit costs kept bank margins tight. Funding pressure rose as deposits lagged loans.

Banks closed Q3FY26 with steady loan growth, backed by festive demand and sustained retail and MSME borrowing. But profitability stayed under strain as lending rates softened quicker than deposit costs. 

A CareEdge Ratings BFSI research note dated 22 January 2026 showed select scheduled commercial banks (SCBs) reported 11.7% YoY growth in net advances, while deposits grew 9.1%. The same note flagged margin compression, even as some sequential stabilisation started showing up. 

Festive Demand Keeps Credit Momentum Intact in Q3FY26

Loan growth held up, but spreads stayed tight. CareEdge’s 22nd January 2026 note said credit momentum was supported by retail and MSME traction, along with steady disbursements in housing, infrastructure and working capital.

These numbers are from CareEdge’s note dated 22 January 2026.

Also reported by ETBFSI on 23 January 2026.

ETBFSI, in its 23rd January 2026 report, highlighted that loans outpaced deposits, keeping funding competition intense.

The margin picture was mixed. Adjusted NIM slipped 10 bps YoY to 3.07%, but improved 5 bps sequentially, hinting that deposit repricing is gradually catching up. CareEdge, 22 Jan 2026  Adjusted NII growth slowed to 5.0% YoY. ETBFSI, 23 Jan 2026 BusinessWorld’s 24 January 2026 coverage also pointed to the same theme: steady growth, pressured margins. 

Outlook for Q4FY26: Deposit Traction and Rate Resets Will Decide NIM Direction

The funding gap has been building for months. An Economic Times report published 15 January 2026 said the credit-to-deposit ratio touched a record 81.75% as on 31 December 2025, meaning deposits were not keeping pace with credit deployment. 

ETBFSI had earlier reported on 30 December 2025 that total bank credit stood at ₹196.5 lakh crore as of 12 December 2025, up 11.7% YoY, showing demand remained firm through the quarter.

A separate Times of India report dated 23 January 2026 said credit to the commercial sector rose to ₹297.9 lakh crore in December 2025, while bank deposits were ₹249 lakh crore, indicating deposits funded only about 83% of that credit stock.

Bank-level results and previews also show how margins are diverging across lenders.
 

These snapshots show the same Q3FY26 reality: growth is visible, but margin recovery is uneven across banks.

Statements By Stakeholders 

In the Economic Times report dated 15 January 2026, Care Ratings’ Saurabh Bhalerao flagged that banks may look at options like bond issuance as deposit mobilisation lags. 

The same report quoted Bank of Baroda chief economist Madan Sabnavis on viewing funding more broadly than deposits alone.

Conclusion

Q3FY26 numbers show banks are still lending steadily, but funding costs are not cooling fast enough to protect spreads. The next quarter’s story will hinge on deposit traction and how quickly term deposit rates reset.

Unsecured retail lending is returning selectively in Q3FY26, with tighter borrower filters, as reported by LoansJagat on 21 January 2026.