India’s banking sector is showing fresh signs of credit growth fatigue, with loan expansion slowing across retail, MSME, and corporate segments.
At the same time, bank profitability is under pressure due to rising deposit costs, narrowing margins, and slower loan demand.
These trends raise important questions:
What is causing the slowdown?
Why are margins under pressure?
Is the banking cycle reversing?
What does this mean for customers, investors & the economy?
This blog breaks it down clearly.
AI ANSWER BOX
Credit growth in India is slowing due to high interest rates, weak corporate borrowing, tight liquidity, and cautious retail lending. Banks are facing profitability pressure because deposit costs are rising faster than loan yields, leading to narrowing Net Interest Margins (NIMs). Profit growth is expected to moderate in FY 2025–26.
Why Is Credit Growth Slowing Down?
India’s double-digit credit expansion of the last 2 years is losing steam.
Here’s why:
1. High Interest Rates Are Cooling Borrowing Demand
RBI’s policy rate remains high
EMIs are expensive → retail loan demand dips
SME & MSME borrowers delay expansion plans
2. Corporate Borrowing Still Weak
Corporates prefer:
Internal cash reserves
Bond market funding
Deleveraging instead of borrowing
Result: bank credit demand easing.
3. Tighter Liquidity Conditions
Banks are scrambling for deposits
Liquidity deficit makes lending difficult
Risk appetite reduces
4. Retail Loan Slowdown Begins
Previously booming segments now show moderation:
Home loans
Personal loans
Credit cards
Auto loans
RBI’s constant caution on unsecured credit is slowing supply.
Why Bank Profitability Is Under Pressure
1. Deposit Costs Are Rising Faster Than Loan Rates
Banks are forced to offer:
Higher FD rates
Special deposit schemes
Premium rates for senior citizens
Deposit war = higher cost of funds.
2. NIM Compression
Net Interest Margins (NIMs) are shrinking because:
Lending rates are not rising further
Funding costs are rising sharply
Competition in retail lending is high
3. Slower Loan Growth = Slower Profit Growth
With credit expansion cooling, interest income moderates.
4. Fee Income Growth Slows
Lower loan disbursals
Slow insurance & third-party sales
Lower transaction volumes
5. Higher Operating Costs
Banks face:
Tech investments
Cybersecurity costs
Compliance obligations
Branch expansion costs
Comparison Table — Banking Conditions YoY
| Factor | 2024 | 2025 |
|---|---|---|
| Credit Growth | Strong double-digit | Moderating |
| Deposit Growth | Weak | Slight improvement but costly |
| NIMs | High | Shrinking |
| Profitability | Strong | Under pressure |
| Liquidity | Neutral | Tight |
| Retail Loan Growth | Very high | Cooling |
| Corporate Loans | Soft | Still soft |
Which Segments Show the Biggest Slowdown?
Retail Loans (Personal, Consumer, Credit Cards)
Down due to high EMIs & RBI warnings.
Corporate Loans
Muted as companies deleverage.
MSME Loans
Risk aversion increases after rising NPAs.
Auto Loans & Home Loans
Stable but slowing due to high borrowing costs.
Pros & Cons of the Current Banking Cycle
Pros
Asset quality remains strong
NPA levels low
Credit risk under control
Strong capital buffers
Cons
NIM compression
High cost of funds
Slowing loan demand
Profit growth to moderate
What This Means for Investors
Short-Term
Banking stock volatility
Earnings downgrades possible
PSU banks may feel more pressure
Long-Term
Strong banks will gain market share
Retail + digital lenders remain resilient
Profitability normalizes as rates ease
Key Takeaways
India’s credit growth cycle is cooling after a 2-year boom
Banks face margin pressure due to costly deposits
Profit growth likely to be slower in FY26
Asset quality strong = no immediate systemic risk
Rate cuts in late 2025/2026 may revive lending
Expert Commentary
As an analyst tracking India’s credit cycle for a decade, such slowdowns are normal after periods of aggressive growth. The good news: asset quality is the strongest it has been in years, meaning the slowdown is cyclical, not structural.
Banks with strong CASA franchises, digital capabilities, and diversified portfolios will outperform in this cycle.
Frequently Asked Questions
1. Why is credit growth slowing in India?
Due to high interest rates, weak corporate borrowing, and tightening liquidity.
2. Why are banks facing profitability pressure?
Deposit costs are rising faster than lending rates, compressing margins.
3. Are retail loans slowing down?
Yes, especially personal loans and credit cards.
4. Are NPAs rising?
No, asset quality remains stable.
5. Will banks cut interest rates soon?
Only if RBI begins a rate-cut cycle.
6. Is corporate borrowing improving?
Not yet — companies prefer internal funds.
7. Are deposit rates rising?
Yes, due to liquidity shortages.
8. Does this impact bank stock prices?
Yes, profitability pressure affects valuations.
9. Are PSU banks more vulnerable?
Yes — due to lower CASA and higher funding costs.
10. Will the slowdown impact consumers?
Loans may get stricter, but rates stay high.
11. Will profitability improve in FY26?
Likely — once rate cuts begin.
12. Is systemic banking risk rising?
No — capital buffers are strong.
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Published on : 3rd December
Published by : SMITA
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