It’s been a good year for borrowers, with the Reserve Bank of India slashing its benchmark repo rate by 100 basis points (1 per cent) and expectations of at least another 25 basis points cut this year. Banks have reciprocated by cutting lending rates. However, credit growth has still remained low. So, why aren’t people, as well as corporations, not borrowing enough?
The repo rate, which is the rate at which the central bank lends money to commercial banks, has come down to 5.50 per cent from 6.50 per cent so far in 2025. If your loan is linked to an external benchmark like the repo, interest rates have come down by a similar magnitude. Now, such loans account for around 60 per cent of the loans, while around 36 per cent of the loans are linked to the marginal cost of funds-based lending rate (MCLR). Interest rates on such MCLR-based loans are dependent on a bank’s cost of funding and get adjusted with a lag.
According to a report by CareEdge Ratings, non-food credit growth moderated to 9.3 per cent year-on-year in June, a significant drop from around 14 per cent in June 2024. India Ratings too shared similar data, with credit growth as of July 11 declining to 9.8 per cent from 14 per cent in July 2024.
“India’s bank credit-to-GDP ratio remains relatively low, underscoring significant long-term potential for credit expansion. However, as of June 2025, overall credit growth has moderated, reflecting a combination of sector-specific challenges and overall subdued business growth,” said Sanjay Agarwal, senior director at CareEdge Ratings.
As corporate credit growth has slowed, banks have focused on lending to the retail segment. In recent years, retail has emerged as the prime driver of credit growth in the banking system. The retail segment had an incremental contribution of 44.7 per cent in May 2025, up from 36.7 per cent in the previous year.
Personal loans were one segment that grew rapidly in the post-COVID-19 years, but RBI tightening its rules in this segment worried about stress build-up, which applied the brakes on its accelerated momentum. This segment accounts for nearly a third of gross bank credit. In June 2025, it grew 12.1 per cent, slower than the 16.6 per cent growth in the same period a year ago.
“In the personal loans segment, the dependence on housing, which has slowed noticeably, has impacted overall demand,” noted Agarwal.
India’s economic growth has been moderating. After growing 9.2 per cent in 2023-24, the GDP growth slowed to 6.5 per cent in 2024-25. The Reserve Bank has projected a 6.5 per cent GDP growth in the current financial year too. But the recent 25 per cent reciprocal tariffs announcement by the US administration is expected to have some negative impact, possibly shaving off a few basis points of growth. A slowing economy does get reflected in slower credit demand, too.
Credit growth has been weaker across key consumer categories such as durables, education loans, vehicle loans, other personal loans and credit cards outstanding dues.
One segment, though, has been a big outlier, and that is gold loans. Gold has been shining brightly over the past 18 months, with prices topping over Rs 1 lakh per 10 gram now. That has made gold loans extremely attractive as borrowers now get a larger loan amount for the same quantity of gold.
Not surprisingly, the gold loan segment grew 124 per cent in June 2025, compared with around 31 per cent rise, a year ago. Had it not been for gold loans, the overall personal loan growth would have moderated further to 9.5 per cent.
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Corporate loan growth has, as such, been slow for some time now. Throughout financial year 2024-25, liquidity conditions were generally tight, private sector capital expenditure spending was slow, and corporates were also focusing on deleveraging their balance sheets. But, importantly, banks now have increasing competition from the capital market, where the rate transmission tends to be quicker.
A study by the State Bank of India’s research department notes borrowing via commercial papers has increased to Rs 3.95 lakh crore between April and June 15, 2025, compared with Rs 3.2 lakh crore in the same period a year ago. In 2024-25, fundraising via commercial papers was up 14.4 per cent to Rs 15.7 lakh crore from Rs 13.7 lakh crore in 2023-24.
Equity fund raising, be it initial public offerings, follow-on offers, qualified institutional placements, Infrastructure and Real Estate Investment Trusts, etc., nearly doubled to Rs 3.71 lakh crore in 2024-25 from Rs 1.90 lakh crore, a year earlier.
“Though, equity will be an enabler to support further growth and debt raising in longer term, in short-term these trends affect bank credit growth, as a part of the same may have been used to repay debt prematurely as also fund capex requirements,” said Soumya Kanti Ghosh, group chief economic advisor at SBI and the member of the 16th finance commission.
The RBI will announce its latest monetary policy committee decisions on Wednesday. It is likely that it may keep its repo rate unchanged and leave space for more rate cuts in the second half of the financial year. But some feel the tariff announcement by the US and the extremely benign inflation rate may just prompt it to go for another cut. As such, borrowers can expect a low-interest-rate regime for some time now.
