Bank credit growth is expected to moderate ~200 basis points (bps) to ~14% this fiscal after an estimated robust growth of 16%1 in fiscal 2024.
Strong economic activity and retail credit demand drove loan growth last fiscal. This fiscal, growth will be tempered by a high base effect, a revision in risk weights and a somewhat lower gross domestic product (GDP) growth, says rating agency Crisil.
“The fundamental drivers of credit demand are broadly intact and a revival in private corporate capital expenditure (capex), especially towards the second half of fiscal 2025, can provide tailwind. On the other hand, the pace of deposit growth can keep a check on credit growth, even though the differential between the two has reduced over the past year, it said.
Within the expected overall bank credit growth of 14% in fiscal 2025, the largest segment, corporate credit (45% of bank credit) should see growth remaining steady at 13%, while retail (28% of bank credit), the second-largest segment, is expected to grow the fastest at 16% (see chart 2 in annexure).
Ajit Velonie, Senior Director, Crisil Ratings, said, “Growth in corporate credit will be supported by private sector industrial capex in fiscal 2025, underpinned by expectations that GDP growth will remain solid at 6.8%, although lower than an estimated 7.6% in fiscal 2024. Steel, cement and pharmaceuticals will lead the capex recovery. Emerging sectors such as electronics and semi-conductors, electric vehicles (EVs) and solar modules will also contribute to capex, especially over the medium term.
The pick-up in capex should offset the impact of lower growth in bank funding to non-banking financial companies (NBFCs) – key growth driver within corporate credit earlier – on account of the 25 percentage points higher risk weight on lending to higher-rated NBFCs.
Retail credit
Retail credit will print a tad lower at 16%, compared with 17% in fiscal 2024, but will remain the fastest-growing segment for banks. Retail will feel the drag of lower growth in unsecured consumer credit (25% of retail credit) as banks realign their strategies following the regulatory stipulation of additional 25 percentage points risk weight and strengthen their underwriting processes to counter a potential rise in delinquencies.
The high-base effect, especially with the merger of HDFC Ltd with HDFC Bank in fiscal 2024 will also have a bearing on retail growth.
Nevertheless, the relatively higher yields in unsecured consumer credit and, hence, the ability to absorb the higher capital charge, will limit the decline in retail growth. Further, home loans remain the largest constituent of retail credit and should grow steadily, given increasing preference for home ownership and better affordability.
MSME segment
Growth in the MSME segment (16% of overall credit) is estimated at 15% this fiscal, off a higher base, having expanded a robust 19% in fiscal 2024. This segment will be supported by a revival in downstream capex, the role of MSMEs in the central government’s Atmanirbhar Bharat initiative, and benefits accrued from the Productivity-Linked Incentive scheme. Also, with greater formalisation of the sector, including improving digital public infrastructure, the addressable base for banks has been expanding continuously.
Agricultural credit growth will remain linked to monsoon trends but should witness a moderation on the back of a strong fiscal 2024.
