Mid-cap banks are back in favour. But only a few will ride the next rally.

Subscribe to enjoy similar stories. The Street is positioning mid-cap banks at the front of the next financial sector rally, betting on stronger small-business and retail loan growth in 2026 and easing funding costs. Investors view these lenders as prime beneficiaries of the next credit upcycle, given their increased exposure to high-yielding retail and micro, small and medium enterprise (MSME) loans.

Credit to micro and small enterprises jumped 26% year-on-year in October, the strongest in two years, while medium enterprise lending climbed to a six-month high of 18% after a soft patch, Mint’s analysis of Centre for Monitoring Indian Economy’s (CMIE) latest data showed. Retail credit growth also picked up to a 14-month high of 14% in October, though it remains below the 25%-plus surge last seen in July 2024. More importantly, these segments outpaced overall system credit growth of 12.5%, which itself hit a 13-month high during the same period, the analysis showed.

Trideep Bhattacharya, president and CIO of equities at Edelweiss Asset Management, sees a broad-based credit revival over the next six to twelve months, with easing microfinance stress further strengthening the case for mid-cap banks. “While credit growth could rebound across segments from a low base, MSME and retail are likely to grow faster," he said. This shift is crucial because mid-cap banks, with their strong regional footholds, are best placed to ride it, explains Ninad Jadhav, equity research analyst at LKP Securities.