Credit Growth for Banks Expected to Slow to 12 Percent as Regulatory Measures Tighten Lending Conditions

Credit Growth for Banks Expected to Slow to 12 Percent as Regulatory Measures Tighten Lending Conditions

According to ICRA, credit growth in India’s banking and Non-Banking Financial Companies (NBFC) sectors is anticipated to decelerate significantly in the current fiscal year due to new regulatory actions and tighter funding conditions. Banks’ credit expansion is projected to slow to 12%, amounting to approximately ₹19-20.5 lakh crore, down from 16% in FY2024. Meanwhile, NBFCs are expected to see a sharp drop in assets under management (AUM) growth, forecasted at 16-18% compared to 25% in the previous year.

Anil Gupta, Senior Vice President and Co-Group Head at ICRA, highlighted the importance of regulatory constraints to prevent overheating in the credit sector, which may eventually allow banks to reduce deposit rates, supporting margins once the rate-cut cycle begins, likely in the first half of 2025. The recent surge in retail credit has led to over-leveraging in certain segments, raising concerns over borrowers’ refinancing capacities as banks adopt a more risk-averse approach. Gupta noted that stress is currently evident in unsecured lending, with the potential for spillover to secured segments, including loans for used vehicles, micro-Loans Against Property (LAP), and other retail credit products.

The contribution of the retail sector and NBFCs to banks’ incremental credit flow declined from 48.9% in August 2023 to 42.9% by August 2024, reflecting a slowdown in credit flow to NBFCs, which primarily channel funds to retail borrowers. This trend suggests a potential slowdown in retail credit growth over the next 12 to 18 months. Demand for retail credit remains high, but regulatory pressures aim to mitigate risks in overheated retail segments. With a high reliance on bank funding, NBFCs are likely to face ongoing challenges, especially those involved in unsecured and digital lending, as funding becomes constrained.

A.M. Karthik, Senior Vice President and Co-Group Head at ICRA, emphasized that reduced credit flow to NBFCs will curb AUM growth, with those specializing in microfinance and unsecured loans projected to experience moderated growth of 10-12% and 19-21%, respectively, in FY2025, compared to 30% and 38% in the prior year.