SBI, ICICI Bank top Motilal Oswal’s banking picks: Sees 15% credit growth amid easing stress

Motilal Oswal top picks: ICICI Bank, HDFC Bank, SBI, and AU Small Finance Bank

Motilal Oswal’s preferred names are ICICI Bank, HDFC Bank, State Bank of India, and Au Small Finance Bank. The broking favours lenders with strong execution, liability franchise depth, and disciplined underwriting. ICICI Bank and HDFC Bank are their top private sector picks, while State Bank of India is the preferred public sector lender. AU Small Finance Bank is positioned ahead of its transition toward a universal bank.

System-wide, bank credit growth is tracking at 13 to 15% year-on-year for FY26, with State Bank of India having revised its guidance upward. The CGTMSE framework continues to support public sector banks by enabling collateral-free lending at repo-linked rates, the report added.

“We continue to favour lenders with strong execution, liability franchise depth, and disciplined underwriting. ICICI Bank and HDFC Bank remain our top private sector picks, offering compounding growth with robust asset quality,” Motilal Oswal Financial Services said.

Motilal Oswal on micro, small and medium enterprises lending: Public sector banks are taking over

The most decisive trend in the report is the market share gain by public sector banks in Micro, Small and Medium Enterprises credit. Motilal Oswal noted that loan growth has improved to approximately 14.5% year-on-year as of February 2026, compared to around 11.1% year-on-year for deposits, with incremental credit largely coming from state-owned lenders. 

The Credit Guarantee Fund Trust for Micro and Small Enterprises scheme , which offers government-backed guarantees of up to Rs 5 crore per eligible borrower, has been a structural driver. Banks are combining partial collateral with these guarantees in hybrid structures, allowing them to lend to smaller businesses without carrying the full credit risk.

State Bank of India is leading execution on the ground, with direct selling agents reporting backlogs of 10 to 12 files per relationship manager. ICICI Bank and HDFC Bank remain the most competitive private sector players, leveraging funding cost advantages and underwriting depth, the report added.

Axis Bank has slowed activity, adopting a cautious stance in the unsecured Micro, Small and Medium Enterprises segment. Tier-3 cities with strong industrial bases are emerging as preferred origination markets, where branch density is adequate and borrower behavior is more stable, as per the report.

“PSU banks are gaining share, supported by competitive repo-linked pricing, CGTMSE scheme, and improved underwriting. SBI leads execution, alongside ICICI and HDFC,” Motilal Oswal Financial Services said.

Motilal Oswal on unsecured business loans: Stress is easing, recovery is selective

The unsecured lending segment spent much of the past year under pressure from two directions. Retail investors who borrowed via personal and business loans to fund equity positions saw repayment capacity weaken as markets turned volatile. At the same time, fintech lenders scaled aggressively on data-led origination without building strong collection infrastructure, leading to higher delinquencies, as per Motilal Oswal.

Motilal Oswal’s channel checks indicate that incremental stress has stabilized. Banks are re-entering the segment cautiously, with tighter credit filters than in the previous cycle. Underwriting standards remain more restrictive than during the earlier growth phase, and lenders are not reverting to high-velocity, low-documentation origination. The brokerage said recovery is selective, with lenders pursuing growth while maintaining tighter underwriting standards.

“While the headwinds have been gradually receding, banks and lenders have begun actively pursuing new lending opportunities. However, underwriting standards remain tight and more restrictive compared to previous cycles,” the report said.

Motilal Oswal on real estate finance: Inventory piling up, investor demand absent

Real estate is the one segment where Motilal Oswal’s ground checks do not indicate improvement. Transaction volumes in 4QFY26 remain weak, driven by the absence of investor demand. Without investor participation, inventory has increased across residential and commercial segments in Tier-1 micro-markets. Commercial real estate is facing unsold stock, rental visibility has weakened, and end-user demand remains insufficient to absorb the overhang.

Project finance remains a pressure point. Many lenders have stopped funding Category 3 and Category 4 developers due to elevated risk. Larger developers continue to access selective construction finance, but the broader ecosystem remains under strain. There is also a spillover from unsecured lending, with leveraged retail investors facing repayment pressure, which is weighing on incremental property demand, the report added.

“Real estate transaction volumes remain subdued in 4QFY26. The primary driver of weakness is the absence of the investor segment, which has led to an inventory pile-up across both residential and commercial real estate,” the report said.

Motilal Oswal on home loans: Public sector banks cut rates, private banks hold ground

Public sector banks are offering prime rates that are 30 to 40 basis points lower than private peers, and this is translating into stronger growth. Bank of Baroda is growing its home loan portfolio at 16% year-on-year, Bank of India at 16.4%, and Canara Bank at 17.6%. Among private banks, Kotak Mahindra Bank is growing at 18.5%, while Axis Bank’s home loan book has expanded 1.9% year-on-year, the report added.

HDFC Bank continues to dominate the Approved Project Finance segment, which remains its key retail sourcing channel. ICICI Bank’s strength lies in its direct selling agent network, with transparent commissions, real-time portal access, and no mandatory cross-sell requirements. Kotak Mahindra Bank follows a selective, relationship-driven approach, with improved processing through automation, though loan against property turnaround times remain slightly slower, as per report.

“ICICI Bank continues to be rated as the most DSA-friendly bank. Transparent commission structures, real-time portal access for DSAs, and the absence of mandatory cross-sell requirements make ICICI the preferred channel partner,” the report said.

Motilal Oswal on asset quality: Loan rejection rates are falling

Falling loan rejection rates might suggest easing credit discipline, but Motilal Oswal interprets this differently. The report said rejection rates have declined compared to earlier periods, indicating better pre-screening by direct selling agents and improved application quality. Documentation standards and income evidence in submitted files have improved compared to earlier in the year.

Lenders are monitoring export-oriented and commodity-linked sectors closely. Borrower repayment capacity remains broadly stable, though stress is expected in select pockets. Motilal Oswal said geopolitical developments could pose risks to export-linked borrowers in Gujarat and Maharashtra.

“Loan rejection rates have declined compared to earlier periods, suggesting improved underwriting efficiency and better screening of applicants,” the report said.

Conclusion

India’s banking sector in 4QFY26 is showing steady trends. It is moving through a phase of stress normalization in unsecured credit toward more selective growth. Public sector banks are gaining on pricing and guarantee-backed lending, while private banks remain competitive on distribution and processing. Real estate remains weak. Motilal Oswal said credit quality is improving, and system growth of 13 to 15% remains supportive for lenders with strong execution.

Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.