Muted credit growth signals prolonged slowdown in industry and retail lending, ET BFSI

India’s banking sector is ready for a protracted interval of subdued credit progress, as each trade and retail lending proceed to decelerate. Weak non-public capital expenditure (capex) in manufacturing and the Reserve Bank of India’s (RBI) tighter threat norms on unsecured loans are limiting credit score enlargement, elevating considerations over broader financial momentum in FY26.

Business credit score progress remained sluggish at 8.04% in January 2025, persevering with a pattern of weak enlargement over the previous three fiscal years. Regardless of coverage measures aimed toward boosting manufacturing, giant companies stay hesitant to borrow for long-term investments, preferring the bond market as a result of higher credit score scores. Whereas banks report a rise in mortgage inquiries, precise disbursements stay weak.

Many of the borrowing exercise has been pushed by micro, small, and medium enterprises (MSMEs), primarily for working capital wants fairly than enlargement. Nevertheless, lenders have gotten cautious about MSME publicity as a result of rising stress within the section. Authorities-backed credit score assure schemes have supplied some assist, however they haven’t been sufficient to drive a significant uptick in trade credit score.

The slowdown in credit score progress has traditionally been linked to weaker manufacturing gross worth added (GVA), which is estimated to increase by simply 5.8% in FY25. Analysts anticipate general mortgage progress to achieve 12% in FY25, with a attainable enchancment to 13-14% in FY26, although a big capex revival stays unsure.

Retail credit score

Retail credit score progress has additionally slowed sharply, dropping to 12% in January 2025 from 29% a 12 months earlier. The slowdown has been pushed by a steep decline in private mortgage progress, which fell to 9% from 23% in the identical interval. The RBI’s choice in November 2023 to extend threat weights on unsecured loans by 25 share factors has made banks extra selective, impacting bank card spending, which grew simply 13% in January 2025 in comparison with 31% a 12 months earlier.

Residence and automobile mortgage progress has additionally weakened, reflecting a broader decline in credit score demand. Residence mortgage progress slowed to 11%, whereas automobile mortgage enlargement slipped to 10%, down from 37% and 16% progress, respectively, in January 2024. Larger rates of interest on retail loans—together with house, automobile, and private loans—have deterred new borrowing.

In distinction to the general pattern, gold loans have witnessed robust progress, surging 77% year-on-year to Rs 1.8 lakh crore by January-end. The rise in gold costs has boosted demand for loans in opposition to jewelry, making them one of many few brilliant spots within the retail lending section. Nevertheless, shopper sturdy loans have declined by 2%, signaling weak shopper sentiment regardless of festive spending tendencies.

No fast indicators of rebound

With excessive rates of interest and cautious lending insurance policies in place, credit score progress is unlikely to see a pointy restoration within the close to time period. The RBI’s current measures to scale back threat weights on financial institution loans to NBFCs and microfinance establishments could enhance shopper credit score, however investment-related lending stays constrained. The Union Price range’s concentrate on consumption fairly than manufacturing funding additionally suggests that non-public sector capex could take longer to get better.

The trajectory of trade and retail credit score progress within the coming quarters might be essential in figuring out the tempo of economic recovery. Whereas analysts anticipate a marginal enchancment in general credit score progress in FY26, a significant revival in manufacturing funding and shopper lending stays unsure.