Banking

India’s Financial Sector Eyes 11% Credit Growth in FY25 Backed by RBI Reforms and Stronger Balance Sheets

India’s banking and financial services industry is entering FY25 with steady momentum. Based on the latest RBI data and sector reports, national bank credit growth has eased to around 11% year-on-year, compared with nearly 16% in FY24. This moderation is partly cyclical, as interest rate transmission, tighter underwriting, and risk-conscious lending weigh on incremental credit. Yet the underlying message is one of resilience: fundamentals are stronger, capital positions are healthier, and policy support remains a tailwind.

Drivers of the Current Growth Path
As of March 2025, the gross non-performing asset (GNPA) ratio of public sector banks has declined sharply from 9.11% in March 2021 to 2.58%, indicating a significant improvement in asset quality and a reduction in stressed loans over the past four years. At the same time, the capital-to-risk weighted assets ratio (CRAR) of the banking sector stood at 17.2%, well above the Basel III minimum requirement, showing that banks maintain a strong capital buffer to absorb potential losses and support further credit growth. A key driver of this improved environment is regulatory support. The Reserve Bank of India has recently relaxed Liquidity Coverage Ratio (LCR) requirements, potentially releasing an estimated ₹3 trillion of additional lendable resources into the banking system, which could contribute 1.5–2 percentage points to credit growth in the near term. Simultaneously, the RBI has adjusted risk weights on certain categories of loans, particularly in retail and NBFC exposures, easing capital strain on lenders and allowing for more efficient deployment of funds. Monetary policy also plays a crucial role in shaping credit conditions. After two years of aggressive tightening, the RBI’s stance has shifted to neutral to slightly accommodative. Although the repo rate remains elevated, improving liquidity conditions and softer bond yields provide borrowers with access to relatively cheaper credit. For banks, however, this environment carries the risk of margin compression, as deposit costs—especially on term deposits—remain sticky, potentially narrowing the gap between lending and deposit rates.

Credit Growth Overview
In FY25, overall credit growth in India moderated to approximately 11%, down from 16% in FY24, reflecting a more stabilized lending environment after two years of rapid expansion. During this period, banks extended a total of ₹18.11 trillion in credit, compared with ₹27.56 trillion in the previous fiscal year, indicating a moderation in incremental lending. On the deposit side, total bank deposits increased to ₹20.99 trillion in FY25, slightly lower than ₹27.56 trillion in FY24, suggesting that while deposit mobilization continues, the pace has eased in line with overall credit growth.

Segmental Shifts
In FY25, credit to MSMEs grew by approximately 20%, reaching a total of ₹40 trillion, with public sector banks holding 45.7% of the market share in the micro segment, while private sector banks dominated lending to small and medium-sized enterprises. MSME lending remains the fastest-growing segment, expanding at around 13% year-on-year, supported by government-backed guarantee schemes and a rising demand for working capital. Retail credit continued its upward trajectory, with personal loans comprising about 32% of total credit, largely driven by housing loans. In addition, FinTech NBFCs played a significant role in expanding access to unsecured consumer credit, sanctioning a record 10.9 crore personal loans totaling ₹1,06,548 crore in FY25. In the corporate segment, companies increasingly relied on non-banking financial channels, with nearly half of total funding coming from equity markets, bonds, and NBFC loans rather than traditional bank borrowing. Corporate credit growth has remained modest, around 5–6%, as many companies continue to deleverage or fund projects internally, limiting their demand for new loans. Agricultural credit also expanded steadily, registering growth of 7.3%, with advances reaching ₹23.14 lakh crore, although its pace remains slower compared with retail and MSME segments.
Overall, credit growth across sectors in FY25 presents a varied landscape. MSMEs and retail borrowers are the primary drivers of expansion, reflecting both sustained household demand and strong policy support. In contrast, corporate lending is subdued due to internal financing preferences, while agricultural lending grows steadily but at a moderate pace. Meanwhile, NBFC lending has slowed to roughly 5.7% year-on-year, even as fintech platforms continue rapid growth in unsecured consumer credit; however, this segment faces regulatory scrutiny that could influence near-term trends.

Key Risks to Watch
* Margin pressure is the most pressing. Even if credit demand holds up, banks may struggle to maintain net interest margins if deposit costs remain high. Private banks, in particular, are experiencing slower CASA (current and savings account) growth, forcing them to rely more on costlier term deposits.
* Uneven Demand Landscape: Corporate credit appetite remains weak, and infrastructure lending is sluggish, raising questions about the durability of system-wide growth. Additionally, global risks—such as higher oil prices, trade disruptions, or a stronger U.S. dollar—could tighten external financing conditions and indirectly affect domestic credit supply.
* Unsecured Retail Lending—a fast-growing category—has invited regulatory scrutiny. Any sharp tightening in norms here could dent near-term growth in certain NBFCs and fintechs.

Investor Implications
For investors, the message is to be selective. Banks with strong deposit franchises and diversified loan books are better placed to sustain growth without excessive margin sacrifice. Public sector banks have gained from capital injections and improved asset quality, while private sector lenders remain more efficient in digital adoption and risk assessment. NBFCs focused on niche areas such as vehicle finance, affordable housing, or MSME lending may outperform, but they remain vulnerable to shifts in funding costs. Insurance companies and asset managers, while not direct lenders, benefit indirectly as financial deepening and credit penetration increase savings and investment flows.

Outlook
The financial sector’s ~11% credit growth in FY25 should be seen not as a slowdown but as a stabilization after two years of rapid expansion. With liquidity injections, stronger balance sheets, and regulatory clarity, lenders are positioned for sustainable medium-term growth. The challenge lies in balancing growth with prudence: avoiding a surge in risky assets while maintaining profitability amid shifting rate dynamics. For equity markets, the sector remains central. Financials constitute a significant share of benchmark indices, and their performance often sets the tone for broader market sentiment. While valuations for many banks remain attractive, the real differentiator will be deposit mobilization strength, credit discipline, and digital adaptability.

Conclusion
India’s financial sector is transitioning into a more balanced growth phase. With credit growth stabilizing at ~11%, supported by policy measures, resilient retail and MSME demand, and healthier balance sheets, the outlook remains constructive. Risks exist in the form of margin pressures, uneven corporate demand, and regulatory tightening in pockets, but systemic stability is stronger than in previous cycles. For long-term investors, this phase offers opportunities to back institutions that can compound value by combining prudent growth, efficient funding, and digital-led customer engagement. The next year will likely separate structurally strong lenders from cyclical beneficiaries.

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