Banks’ non-food credit growth has slowed for the eighth consecutive month—what printed at 12 percent this February was at 16.6 percent a year ago. The decline is primarily due to a drop in personal and credit card loans following tighter norms by the RBI last year. While growth in personal loans more than halved to 8.4 percent in February from 19.5 percent a year ago, growth in outstanding credit card debt dropped to 11.2 percent from 31 percent. Similarly, credit growth in the services sector decelerated to 13 percent from 21.4 percent, primarily due to a drop in non-banking financial companies’ (NBFC) loans, while loans to industries grew 7.3 percent, lower than the 8.4 percent a year ago. Going by the trendline, rating agencies have revised their 2024-25 forecasts downwards to 10.5-11 percent from the earlier estimates of about 11.6-12.5 percent. They also believe that credit growth will remain subdued in 2025-26 at 9.7-10.3 percent.
Thanks to the rush in retail loans, banks’ loan books grew sharply in recent years. A worried RBI swiftly imposed higher capital norms for personal and credit card disbursals, as well as credit to NBFCs, which in turn has slowed credit demand in the past eight months. Fearing loan defaults, the central bank in November 2023 had increased risk weights to mandate banks and NBFCs to set aside 25 percent more capital for every retail loan disbursed. Banks, on their part, scaled back to reduce credit-deposit ratio amid thinning deposits. Both measures have had their desired impact, with unsecured loan growth slowing to low single-digits. So, in February, the RBI has partially reversed the tightness of the norms, leading analysts to expect a growth rebound in the coming quarters.
Broadly, both private and public sector banks are turning in profits. But net interest margins are likely to shrink given the rising deposit rates and incoming rate cuts. While asset quality remains strong, with the non-performing asset ratio touching a multiyear low of 2.6 percent last September, bad loans are expected to rise to about 3 percent by 2025-26. Lenders are also reworking strategies to improve their balance sheets by reducing risky loans and mobilising retail deposits. While the latter move is important, banks and the regulator must also ensure stringent credit evaluation for both industrial and retail loans, so that higher lending does not turn toxic yet again.