Banks’ loan growth has continued to moderate for the fifth consecutive month, as indicated by central bank data. This trend reflects lenders’ efforts to tighten the reins on unsecured and personal loans following regulatory measures aimed at curbing “exuberant” lending.
In November, bank credit recorded an 11.8% year-on-year increase, a slowdown compared to the 16.5% rise observed in November 2023, excluding the effects of a major merger. When considering the merger, the overall loan growth was at 10.6%, a significant drop from nearly 21% during the same month last year.
The trend of diminishing loan growth has persisted, with the rate declining to 12.8% in October when excluding merger effects and to 11.5% incorporating the merger. This slowdown has been evident since the summer months of July, August, and September.
Indian banks have traditionally experienced robust double-digit loan growth, fueled by strong retail demand and urban consumption trends. However, towards the end of 2023, the central bank expressed concerns regarding the increase in bad loans and subsequently implemented stricter capital requirements for personal loans and credit cards, which is now manifesting as a slowdown in these sectors.
Personal loan growth experienced a notable decline, falling to 12.2% in November from 22.4% a year ago, excluding merger impacts. Similarly, the growth in outstanding credit card debt decreased to 18.1% from 34.2% year-on-year.
The central bank has cautioned the financial sector against “all forms of exuberance,” urging lenders to remain vigilant about potential stress arising from new lending models and highlighting the risks tied to the interconnectedness between banks and non-banking finance companies.
On a positive note, credit growth to industry improved, with loans rising by 8.1% year-on-year in November, surpassing last year’s growth rate of 5.5%. Meanwhile, credit growth in the services sector saw a decline, down to 14.4% from 22.2% a year prior, primarily due to reduced credit growth to non-banking finance companies.
This landscape signifies a critical juncture for banks as they navigate the challenges posed by regulatory measures and shifting economic conditions.
