Decline in Loan Expansion Rate
In recent developments, the growth of bank loans in India has slowed down, with estimates suggesting a 10.8-12.8% increase this year compared to the impressive 11.5% growth recorded in FY25. This slowdown can be attributed to a combination of factors, including a shift in corporate borrowing, tighter regulations, high lending rates, sectoral headwinds, and increased lender caution.
One of the primary reasons for the slowdown is the shift of corporate borrowing away from banks to capital markets. Many large corporates prefer to raise funds through bond and equity markets due to more favourable borrowing terms compared to banks[1][2].
The Reserve Bank of India (RBI) has also played a role in this slowdown. Stricter risk weights on unsecured loans and lending to non-banking financial companies (NBFCs) have prompted banks to adopt more cautious lending practices, particularly in riskier segments like personal loans and credit cards[1][4].
High lending rates and slow transmission of rate cuts have also discouraged fresh borrowing. Although the RBI has cut rates, the impact on loan demand has been gradual due to structural frictions in loan pricing and banks’ conservative stance[1][5].
Sectoral and economic headwinds have further contributed to the slow loan growth. Loan growth to key sectors such as industry, agriculture, and services has decelerated significantly. High property prices and macroeconomic uncertainties have dampened demand for retail loans such as home loans and personal loans[1][3].
Banks have also maintained tighter risk controls and cautious underwriting due to concerns over asset quality and credit risk, leading to slower credit disbursal even as liquidity remains adequate[1][3][5].
Despite these challenges, there are signs of potential stabilization. Analysts expect bank credit to grow by just 11-12% in FY26, suggesting a slow but steady recovery[6]. Borrower confidence and improved liquidity could play a crucial role in this recovery.
Meanwhile, the interest rates on savings accounts have decreased, with many banks offering rates at 2.5%[7]. This move is likely to encourage more deposits, which could help banks in their lending activities.
In conclusion, the slowdown in bank loan growth is a complex issue stemming from tighter regulations, banks’ risk aversion, competition from alternative funding sources, macroeconomic uncertainties, and the lag in monetary policy transmission. While credit growth hit a three-year low in mid-2025, projections suggest potential stabilization if liquidity and borrower confidence improve[1][5].
- The shift in corporate borrowing from banks to capital markets, driven by more favorable borrowing terms, has contributed to the slowdown in bank loan growth.
- Stricter risk weights on unsecured loans and lending to non-banking financial companies by the Reserve Bank of India (RBI) have led banks to adhere to more cautious lending practices.
- High lending rates in conjunction with the slow transmission of rate cuts have dissuaded fresh borrowing and stunted loan growth.
- Sectoral headwinds, such as a significant deceleration in loan growth to key sectors like industry, agriculture, and services, have further contributed to the slowdown in bank loan growth.
