The RBI’s crackdown on erring non-banking financial companies (NBFCs) and rising personal and credit card loans seems to yield results. Led by lower loan disbursals, bank credit growth moderated to 14.4 percent in the first half of 2024-25 against 15.3 per cent in the same period a year ago. According to the latest RBI data, retail loan growth moderated to 16.4 per cent in September 2024, compared to 18.2 per cent a year ago. Within the retail segment, almost all sub-segments saw a slowdown, with housing loans an exception.
Significant declines were seen in the growth of personal loans at 12.1 percent from 23.6 per cent, vehicle loans at 13.3 per cent from 21.2 per cent and credit card loans at 18 per cent from 31.4 per cent. This is a departure from previous years, when banks were turning in healthy, double-digit growth for a while, which forced the central bank to caution against exuberance. To mitigate the risk of bad loans, the RBI even imposed higher capital requirements on banks last year.
Besides retail loans, credit growth to the services sector decelerated to 15.2 per cent from 21.6 per cent, owing to lower growth in credit offtake to NBFCs. In particular, the pace of lending to NBFCs slowed to 9.5 per cent in September 2024 from 21.9 per cent a year ago.
RBI Governor Shaktikanta Das, who has repeatedly flagged concerns regarding fast credit growth, has tightened compliance norms for NBFCs’ loan exposures and has begun taking action on erring shadow lenders. As a result, banks seem to be mindful of NBFCs’ lending, though brokerages expect some stress over the coming quarters.
One upshot is more bank credit to industry, which grew 42.85 per cent in the fiscal first half. Specifically, loans to large firms—the biggest component and one that grew at a dismal pace until recently—has finally turned the corner. Domestic demand is showing proof of life as private consumption is slowly picking up.
Given the healthy balance sheets of banks and corporates, it’s likely that the pace of growth in industrial loans will hold. The government’s continued thrust on infrastructure spending will complement the demand drivers, as the RBI noted in October. That said, banks should be cautious about bad loans, which fell to a 12-year low of 2.8 per cent in March 2024, but are expected to rise in 2024-25.