Context:

• The article discusses the recent slowdown in credit growth of Scheduled Commercial Banks (SCBs) in India.
• It highlights the contributing factors such as RBI policy interventions, sectoral shifts, and evolving credit market dynamics, while emphasizing the resilience of MSME credit and the structural improvements in the banking system.

Decline in Credit Growth - Recent Trends:

• Credit growth fell to 9.5% for the fortnight ending June 27, 2025, compared to 17.4% a year earlier.
• Decline started from May 2024, influenced by regulatory and market shifts.

Reasons Behind the Credit Slowdown:

• RBI’s regulatory measures:
  • The RBI’s decision to increase risk weights on certain segments of consumer credit and bank lending to the NBFCs towards the end of 2023 saw loan growth in these two sectors fall sharply.
  • For example, unsecured loan growth dropped from 28.3% (Mar 2023) to 7.8% (May 2025). NBFC credit growth declined from 5.7% (Mar 2025) to -0.3% (May 2025).
  • Non-performing assets (NPAs) in unsecured retail loans rose to 1.8% in March 2025 (from 1.5% a year earlier), indicating credit risk build-up.
  • NPAs refer to loans or advances from banks and financial institutions where the borrower has stopped making payments (principal or interest) for a specified period, usually 90 days or more.
• Incomplete transmission of interest rate benefits:
  • Private banks’ floating rate loans (EBLR-linked) are lower at 54.7%, compared to 59.8% for public sector banks (PSBs), slowing down monetary policy transmission.
  • External Benchmark Lending Rate (EBLR) is an interest rate framework used by banks in India to determine the interest rates for loans, particularly for retail and MSME loans.
  • EBLR is linked to an external benchmark rate set by the Reserve Bank of India (RBI) or other financial authorities.
  • This ensures faster and more transparent transmission of policy rate changes to borrowers.
• Shift in market share:
  • There is a seemingly visible shift in balance from the private to public banks.
  • PSBs showed stable growth of 12.2% in 2024-25 compared to 13.6% in 2023-24.
  • However, the credit growth of private banks declined to 9.5% — the lowest since 2020-21.
  • PSBs’ share in incremental credit surged from 20% (FY18) to 56.9% (FY25), validating the government's 4R strategy – Recognition, Resolution, Recapitalisation, Reforms.

Improvement in Banking Health Indicators:

• Gross Non-Performing Assets (GNPA): GNPA ratio dropped to a multi-decadal low of 2.3% in March 2025, with the provision coverage ratio of 76.3% in March 2025, as services and industry GNPAs declined significantly.
• Decline in industry NPAs: From ~4% (Sep 2023) to 2.3% (Mar 2025). MSME NPAs decreased sharply from 10.8% (Mar 2021) to 3.6% (Mar 2025).

MSME Sector - A Structural Growth Story:

• Credit growth to MSMEs:
  • Now growing at 18% (May 2025), compared to 5-7% (2011–2013).
  • MSMEs’ share in incremental industry credit rose to 17% (FY25) from 11% in FY24.
• Supporting factors:
  • Improved balance sheets leading to more lending.
  • Substandard loans (90–120 days past due (DPD)) fell to a five-year low of 1.8%.
  • Revised MSME definition (higher turnover/investment limits) expands coverage.
• Government initiatives
  • Enhanced credit guarantee cover and TReDS onboarding threshold reduced from Rs 500 crore to Rs 250 crore.
  • MSME Samadhaan being upgraded for better payment tracking and dispute resolution.
  • URN seeding and formalisation enabling better credit access.
• MSMEs as economic multipliers:
  • MSMEs depend greatly on large corporates through backward integration (and at times, forward integration) and hence their activity level could be a latent gauge of corporate activities.
  • Future focus: Tech upgradation, supply chain resilience, and data-driven policy support.

Evolving Credit Market Landscape:

• Rise of private credit markets: Increasing participation from global players with structured deals. Calls for regulatory stress testing and transparency, as seen in the US.
• Shift to off-bank funding: Companies diversifying via Commercial Papers (CPs), External Commercial Borrowings (ECBs), and capital markets.

India Inc - Stronger Financial Position:

• India Inc has significantly deleveraged (or reduced the amount of debt that a company carries) its balance sheet, while increasing cash holdings.
• In the last two fiscals (FY24 and FY25), the cash and bank balance of corporates has jumped by around 18-19%.
• Major sectors reporting increased cash holdings include IT, automobiles, refineries, power, and pharma.
• The cash and bank balances of India Inc (excluding BFSI) is estimated at around Rs 13.5 lakh crore in FY25, indicating cash accruals are a potential vector in funding capex plans.

Household Savings and Credit Implications:

• Financialisation of savings: Rise in equity share in household savings from 2.5% (FY20) to 5.1% (FY24). Implications for bank deposit growth, the traditional source for credit.
• Comparison: China's equity share in savings is at 9%.

Conclusion:

• India’s credit ecosystem is undergoing a structural transformation.
• Despite the recent slowdown in aggregate credit growth, the resilience in MSME lending, improving asset quality, and a diversifying credit market underscore underlying economic strength.
• Policymakers must now focus on deepening financial inclusion, regulating private credit flows, and leveraging fintech for MSME empowerment while monitoring shifts in household savings behavior.