Loan Growth Hits Three-Year Low: Banks Shift Focus to Asset Quality
Loan growth across various sectors of the Indian economy has dropped to its lowest point in three years. In the fortnight ending on May 30, total loans increased by only 8.97% compared to the same period a year ago. This trend indicates that lending institutions are becoming more cautious, prioritizing asset quality over growth, especially due to growing pressure from microfinance and unsecured loans.
Loan and Deposit Data at a Glance
At the beginning of March 2022, loan growth had fallen below 9%. According to data from the Reserve Bank of India (RBI), the banking system held total deposits of ₹231.7 lakh crore and total loans of ₹182.8 lakh crore. During the fortnight ending May 30, deposits grew by ₹2.84 lakh crore, while loans increased by ₹59,885 crore.
Why Loan Growth Has Slowed
Over the past year, the pace of loan growth has significantly slowed, primarily due to rising defaults in unsecured retail loans such as collateral-free and microfinance segments. Lenders are now prioritizing credit quality, and underwriting standards have become stricter.
Estimates suggest that loan growth for FY2026 may reach 11.5%, followed by 13% in FY2027.
Deposit Growth Outpaces Loan Growth
During the same period, deposit growth was recorded at 9.9%, which is 100 basis points higher than the loan growth rate. This shift has also impacted the credit-deposit (CD) ratio, which fell to 78.9%, down from 98.9% a year ago. This reversal highlights a major change, as loan growth had significantly outpaced deposit growth during the same period last year—by around 700 basis points.
RBI Flags Concerns Over High Credit-Deposit Ratio
The large gap between deposit and loan growth has led to a surge in the CD ratio, prompting repeated RBI warnings. The central bank has advised the entire banking system to reduce this ratio.
Key Drivers Behind the Loan Growth Decline
Since July last year, loan growth has been on a steady decline, falling from the double-digit highs seen in early 2024. The RBI’s regulatory tightening played a crucial role in this shift. Measures included increasing risk weights on unsecured loans—especially those given to non-banking financial companies (NBFCs) and credit card borrowers.
Corporates Turn to Capital Markets for Cheaper Credit
Until February this year, interest rates remained high. However, the RBI’s Monetary Policy Committee (MPC) has now begun easing rates. In the meantime, many Indian corporates—especially those with strong credit ratings—have preferred borrowing from overseas or local capital markets, which offered more affordable credit options than banks.
