Indian Banking Sector Faces Loan Growth Challenges

The Indian banking sector is currently navigating a challenging landscape marked by slowed loan growth and high interest rates. A recent report from S&P Global Market Intelligence highlights these pressures, forecasting a significant decline in loan growth for major banks in the country. This article delves into the factors contributing to this slowdown, the responses from banks, and the overall health of the banking sector.
Declining Loan Growth Amid High Interest Rates
According to the S&P report, loan growth among six of India’s largest banks, which include both private and state-owned institutions, is expected to drop to 12.3% for the fiscal year ending March 31, 2025. This figure is a stark contrast to the 22.5% growth recorded in the previous year. The slowdown is primarily attributed to high interest rates, which have made borrowing more expensive for consumers and businesses alike.
The report indicates that Indian banks are facing margin pressures as loan growth decelerates. Net interest margins (NIMs) at most lenders are projected to decline. This is largely due to rising deposit rates, which are expected to catch up with the high interest rates on loans. As a result, banks may find it increasingly difficult to maintain profitability. The Reserve Bank of India (RBI) has kept its benchmark interest rates elevated, even as other central banks in the US and Europe have begun to ease their monetary policies. This divergence in monetary policy is likely to further impact the lending landscape in India.
Strategic Shifts by Indian Banks
In response to the challenging environment, many Indian banks are adapting their strategies. With the slowdown in lending, banks have begun to scale back on consumer loans and are focusing more on mobilizing retail deposits. This shift aims to strengthen their balance sheets and ensure financial stability in the face of declining loan growth.
Despite the challenges, Indian banks have continued to report higher net profits, albeit at a slower pace. For instance, the State Bank of India (SBI) is projected to see a 5.6% increase in net profit, reaching Rs 701.16 billion for the fiscal year ending March 31, 2025. This is an improvement from Rs 663.79 billion reported in the previous year. Similarly, HDFC Bank, the largest lender by market capitalization, reported a mere 3% growth in gross advances for the quarter ending December 31, 2024, while deposits surged by 16%. These figures illustrate how banks are maneuvering through the current economic climate by prioritizing deposit growth over aggressive lending.
Improving Asset Quality and Future Outlook
Despite the pressures on loan growth, there is a silver lining in the form of improving asset quality within the Indian banking sector. The Reserve Bank of India’s Financial Stability Report from December 2024 indicates that the gross non-performing assets (GNPA) ratio of scheduled commercial banks has dropped to 2.6% as of September 2024. This is the lowest level seen in years and reflects a decrease in defaults, higher write-offs, and steady credit demand.
The RBI has also taken measures to curb excessive lending to riskier borrowers. In November 2024, it raised risk weights on unsecured loans by 25 percentage points, impacting personal loans, credit card debt, and lending to non-banking financial companies (NBFCs). These steps aim to ensure that banks maintain prudent lending practices while navigating the current economic challenges.
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