India’s credit growth declines, but broader financial flows remain resilient

RBI Governor Sanjay Malhotra recently said that although credit growth slowed in 2024–25, the broader flow of financial resources to the commercial sector has improved significantly. Therefore, the slowdown in corporate borrowings should not be viewed in isolation.

According to him, the overall flow of financial resources to the commercial sector increased from Rs 33.9 trillion in 2023–24 to Rs 34.8 trillion in 2024–25. He also stated that “this trend continues during the current financial year.”

To create a level playing field, the government has previously incentivised corporates by cutting corporate tax rates. More recently, in the Union Budget, the government extended substantial benefits to individuals by enhancing the income tax exemption limits.

This move has increased disposable income in the hands of people, encouraging greater spending on consumption, tourism, and luxury items—thereby boosting domestic demand

Currently, there has not been the required credit growth in the banking industry despite the fact that the RBI has reduced the repo rate by more than 100 basis points. This should normally have resulted in a lower cost of borrowed funds and a substantial rise in demand for bank loans.

However, the slower credit growth compared to last year may be due to weak demand for credit for fresh investments and project expansion. Capacity utilisation has also not picked up sufficiently to create demand for fresh term loans. Similarly, demand for fresh working capital loans has been limited due to subdued consumer demand in the market.

Another factor is that, apart from loans that were automatically repriced due to repo rate cuts (linked to market benchmarks), other loans did not benefit from adequate transmission of lower repo rates into lending rates. If banks are unable to offer better lending rates—because their earlier contracted deposit rates, particularly on long-term deposits, remain high—then concerns about a shrinking net interest margin and profitability restrict their ability to pass on lower rates to new borrowers.

In this regard, RBI Governor Sanjay Malhotra recently said that although credit growth slowed in 2024–25, the broader flow of financial resources to the commercial sector has improved significantly. Therefore, the slowdown in corporate borrowings should not be viewed in isolation.

According to him, the overall flow of financial resources to the commercial sector increased from Rs 33.9 trillion in 2023–24 to Rs 34.8 trillion in 2024–25. He also stated that “this trend continues during the current financial year.” As per the RBI’s definition, this flow includes bank loans, loans from non-banks, LIC investments in corporate debt, and funds raised overseas.

Whenever market conditions are favourable, corporates raise funds directly from the market, either through commercial papers or short-, medium-, and long-term debt instruments. They also raise equity resources through fresh issues, rights issues, and private placements when equity markets are favourable.

At the same time, many corporates that are flush with funds due to strong profitability may repay their high-cost bank borrowings in the absence of opportunities for acquisitions or fresh investments.

It is generally expected that reduced interest rates should lead to enhanced credit growth. However, there is often a time lag between repo rate cuts and higher credit demand. For example, as per BCG research, between 2014 and 2016 credit growth did not pick up even after 12–24 months of falling interest rates.

Similarly, a paper authored by Deep Narayan Mukherjee, Gopal Sharma, Kanishka Singh, and Pooja Kaphalia found that between 2018 and 2020, despite stable or declining interest rates, credit growth did not accelerate. By contrast, between 2022 and 2023, credit grew strongly despite rising interest rates. According to the BCG paper, 2016–18 was the only phase in which credit growth aligned with falling interest rates.

To create a level playing field, the government has previously incentivised corporates by cutting corporate tax rates. More recently, in the Union Budget, the government extended substantial benefits to individuals by enhancing the income tax exemption limits.

This move has increased disposable income in the hands of people, encouraging greater spending on consumption, tourism, and luxury items—thereby boosting domestic demand.

In addition, as announced by Prime Minister Narendra Modi on the eve of Independence Day, “GST 2.0” reforms were implemented from September 22nd, introducing two slabs—5% (for essential consumption items) and 18% (for all other items)—as against the earlier four slabs of 5%, 12%, 18%, and 28%. This is expected to significantly boost consumption and economic activity.

Although the reforms may reduce government GST revenues by Rs 48,000 crore, SBI estimates that the actual loss will be minimal (around Rs3,700 crore), as higher economic activity and consumption will partly offset the shortfall. SBI also projects that these reforms could lower inflation by 65–75 basis points in FY 2027.

These reforms may also lead to higher capacity utilisation, prompting corporates to undertake new capex, which would boost credit demand for banks.

Recently, SBI Chairman C S Setty stated that sustained consumption is crucial for driving private capital expenditure (capex), as corporates are already operating at a high capacity—around 75% utilisation. Expansion in sectors like renewable energy, refineries, cement, and steel is dependent on demand revival.

He also noted that many large companies are currently meeting their capex needs using internal cash reserves and capital markets, which explains the muted demand for bank credit.

Another issue for the banking industry is the declining trend in CASA (current account and savings account) deposits. Following the repo rate cut, banks—including SBI—reduced the interest payable on savings accounts. In SBI’s case, since June 2025 the uniform SB interest rate has been 2.5% per annum.

Consequently, SBI’s CASA ratio fell marginally to 39.36% in June 2025, from 40.70% a year earlier and 39.97% in the previous quarter. Similarly, Bank of Baroda’s CASA ratio fell by 64 basis points to 39.33% in the June quarter.

In an effort to protect their net interest margins, banks have reduced SB deposit rates, as the cost of term deposits (locked at higher rates earlier) takes time to adjust downward. While this supports asset-liability management (ALM), it makes SB deposits less attractive for customers.

Therefore, banks need to expand their SB customer base through special campaigns, value-added services, technology-enabled products, cross-selling, and stronger customer engagement. At the recent two-day “PSB Manthan,” the government urged banks to improve CASA deposits, which would help them extend more competitive credit to key sectors of the economy.

Emphasis was placed on agriculture, micro, small, and medium enterprises (MSMEs)—the job-generating sectors critical for inclusive growth.

As of June 2025, Indian banks registered a 10.2% year-on-year growth in non-food bank credit, compared to 13.8% in June 2024.

(The author is former Chairman & Managing Director of Indian Overseas Bank)