Source: The post Indian bank credit slows amid policy shifts and reforms has been created, based on the article “A turnaround for banks” published in “Indian Express” on 19th July 2025
UPSC Syllabus Topic: GS Paper 3- Indian Economy- Banking
Context: Credit growth of scheduled commercial banks in India slowed to 9.5% as of June 27, 2025, from 17.4% a year ago. This decline, visible since May 2024, is shaped by regulatory changes, shifting lending patterns, public-private sector dynamics, and broader financial trends affecting the economy.
For detailed information on India’s Financial Sector – Challenges & Reforms read this article here
Regulatory Impact on Lending Trends
- Curbing Unsecured Loans and NBFC Credit: The RBI’s decision in late 2023 to raise risk weights on consumer credit and NBFC lending reduced loan growth in both sectors. Growth in unsecured retail loans dropped from 28.3% in March 2023 to 7.8% in May 2025. NBFC credit declined from 5.7% in March to -0.3% in May 2025.
- Rationale Behind RBI’s Directive: Despite the regulatory curbs, NPAs in unsecured loans rose to 1.8% in March 2025 from 1.5% a year ago, justifying the RBI’s move to tighten credit norms and limit risk buildup in unsecured lending.
- Transmission Issues in Retail Lending: Low retail loan transmission persists due to fewer floating rate loans in private banks. Only 54.7% of their retail loans are linked to EBLR, compared to 59.8% for public sector banks.
Shifting Dynamics Between Public and Private Banks
- Growth Divergence: While PSBs maintained stable credit growth at 12.2% in FY25, private banks saw a dip to 9.5%—their lowest since FY21.
- Rising Role of PSBs: PSBs’ share in incremental credit surged to 56.9% in FY25 from 20% in FY18, benefiting from the government’s four Rs strategy—recognition, resolution, recapitalisation, and reforms.
- Improved NPA and Provisioning Metrics: The GNPA ratio declined to a multi-decade low of 2.3% by March 2025, with a provision coverage ratio of 76.3%. This improvement stems from sharp NPA reductions in services and MSME-led industries.
The MSME Credit Turnaround
- Credit Growth Revival: MSME credit, once growing at just 5–7% (2011–2013), accelerated to 18% growth in May 2025, driven by improved borrower balance sheets and reduced delinquencies.
- Policy Support and Formalisation: Revised MSME definitions and URN seeding have expanded credit eligibility. Measures like enhanced guarantees, reduced TReDS threshold, and a revamped MSME Samadhaan portal improved liquidity.
- Strategic Role in Corporate Ecosystem: MSMEs, linked to large corporates via backward and forward integration, are now vital indicators of broader corporate activity. Policy orientation toward technology and supply-chain solutions may further spur their growth.
Emerging Credit Market Trends
- Rise of Private Credit Markets: Private credit is growing with innovative structures and global participation, demanding closer regulatory oversight to manage potential risks.
- Shift to Off-Bank Borrowing Channels: Corporates are increasingly using non-bank instruments like commercial papers, ECBs, and capital markets to diversify funding sources.
- Corporate Deleveraging and Cash Reserves: India Inc has deleveraged and increased its cash holdings by 18–19% over FY24–FY25. Major sectors contributing include IT, power, and pharma, with Rs 13.5 lakh crore in total cash reserves (excluding BFSI).
Implications for Future Credit Growth
- Changing Nature of Household Savings: A shift in household savings toward equities (from 2.5% in FY20 to 5.1% in FY24) mirrors China’s 9% rate. This financialisation trend could reshape deposit-driven credit creation.
- Need for Monitoring Credit Origins: With household deposits being the primary source of bank credit, careful tracking of their trends is crucial for predicting future credit supply and banking sector stability.
Question for practice:
Examine the factors contributing to the recent slowdown in credit growth of scheduled commercial banks in India.
