Bank credit growth slows across segments; risks of further deceleration, says RBI FSR – ETCFO-OxBig News Network

Bank credit growth, which refers to any increase in bank lending, is seeing a visible slowdown, the Reserve Bank of India’s June Financial Stability Report (FSR) showed a broad-based deceleration across sectors, lender types, and consumer categories on Monday.

As of June 13, 2025, credit growth for scheduled commercial banks (SCBs) moderated to 9.6 per cent year-on-year, compared to 11.3 per cent growth recorded as of December 13, 2024. This decline follows a period of strong post-pandemic loan growth, which was largely driven by retail and services sector lending.

“Credit growth has slowed, and credit impulse has turned negative. Economic slowdown, if any, amidst heightened uncertainty could drag credit demand lower, which may impact asset quality and profitability,” said RBI today.

Credit converging with Deposits

The RBI said that credit expansion has moved closer to deposit growth. While deposits grew by 10.5 per cent y-o-y as of June 2025, credit growth trailed slightly behind, narrowing the gap between the two funding sources. This convergence trend had already begun by December 2024, when both bank credit and deposits were growing at nearly the same pace, 11.3 per cent and 11.4 per cent, respectively.

Sectoral lending patterns

The June 2025 FSR underlined that the composition of credit is also undergoing a shift. Over the past year, the shares of agriculture and industry in total credit have declined, while services and personal loans have seen a relative rise. However, the momentum in personal and services loans has weakened in recent quarters.

By March 2025, there was a marginal uptick in industrial credit, while growth in personal and services loans moderated further. This is in contrast to the period leading up to September 2024, when services and personal loans were the primary drivers of credit growth.

Another aspect was the resurgence of public sector banks (PSBs). According to the June 2025 FSR, PSBs registered higher credit growth than private sector banks (PVBs) for the first time in over a decade.

Impact of regulatory measures

The slowdown in credit growth is partially attributable to regulatory interventions. The RBI’s move in November 2023 to raise risk weights on unsecured consumer credit and bank lending to NBFCs has had a cooling effect on lending activity in these segments. The June 2025 report confirms a sharp fall in loan growth to both unsecured retail and NBFC sectors since then.

The credit impulse, a measure of the change in new credit as a percentage of GDP, also turned negative in 2024–25, further moderating loan growth.

Consumer loans, which had grown at a compounded annual rate of 20.4 per cent between March 2021 and March 2025, began slowing down post the Q3 of FY 2023–24 regulatory measures. Growth slowed across lender types and product categories. For instance, in March 2025, personal loan growth dropped to 5.7 per cent, and credit card growth fell to 3.7 per cent, compared to much higher rates a year ago.

Contrary to the broader trend, credit to the MSME sector outpaced other segments in 2024–25, and its share in total non-food bank credit grew. Within MSMEs, medium and small enterprises led the growth, while credit to micro enterprises lagged.

Additionally, the asset quality of MSME credit improved, with the gross NPA ratio falling from 4.5 per cent in March 2024 to 3.6 per cent in March 2025. The share of sub-prime borrowers in the MSME loan book also dropped significantly.

Credit Growth vs GDP

With credit growth outpacing nominal GDP growth in the past two years, the credit-GDP gap narrowed to (-)0.7 per cent in Q4 of FY24, down from (-)10.3 per cent in Q1 of FY23. This metric had shown a recovery trajectory, indicating some normalization in the credit cycle.

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