India’s financial landscape is showing signs of slowing momentum, as loan demand across retail, corporate, and SME segments stagnates. While credit growth was strong post-pandemic, recent quarters have witnessed a noticeable dip, raising questions about consumer confidence, borrowing patterns, and banks’ lending strategies.
So, what’s behind this slowdown—and how are both banks and borrowers adapting to the changing financial climate? Let’s dive deep.
1. The Numbers: Credit Growth Loses Steam
According to recent data from the Reserve Bank of India (RBI), overall credit growth fell to around 12–13%, compared to over 16% last year.
Retail loans, once the biggest growth engine, have seen moderation in personal, auto, and home loans.
Corporate credit remains cautious as companies delay expansion plans amid global economic uncertainty.
MSME lending has slowed due to high interest rates and stricter underwriting norms.
This plateauing growth is not a crisis, but a sign of recalibration—where both borrowers and lenders are becoming more selective.
2. Rising Interest Rates: A Key Pressure Point
One of the main reasons behind the stagnation is elevated interest rates.
The RBI has maintained a repo rate of 6.50% since early 2023, keeping borrowing costs high.
Home loans now range between 9% and 10.5%, while personal loan rates exceed 14–16%.
EMI burdens have increased, discouraging new borrowers and straining household budgets.
As a result, many middle-class and salaried consumers are deferring major purchases—cars, homes, and discretionary items—reducing demand for fresh credit.
3. Borrowers Are Prioritizing Debt Repayment
Post-pandemic, borrowers are showing a shift toward financial caution. Many are focusing on repaying existing loans rather than taking on new ones.
Rising costs of living and job market uncertainty are driving people to reduce debt exposure.
Fintech awareness and credit scoring tools (like CIBIL) are helping borrowers track and manage their liabilities better.
There’s also a growing cultural shift—financial discipline over leverage—especially among millennials and Gen Z professionals.
4. Corporate Sector Still in “Wait and Watch” Mode
For India Inc., the slowdown is more strategic than sentimental.
Large corporates are sitting on strong cash reserves, preferring to self-finance projects rather than borrow.
Many firms are waiting for clearer signals on global demand recovery, especially in manufacturing and exports.
Uncertain policy environments in certain sectors (like renewable energy and real estate) are also delaying capital expenditure.
Banks are facing challenges in deploying funds profitably, as credit offtake remains muted despite strong deposit inflows.
5. Banks’ Countermoves: New Strategies for Growth
In response, banks are redefining their lending playbook:
Focus on High-Quality Borrowers: Lenders are prioritizing low-risk customers with stable income and good credit history.
Digital Loan Products: Many are expanding into instant personal loans, BNPL (Buy Now, Pay Later), and small-ticket credit.
Partnerships with Fintechs: Collaborations help banks reach underserved customers via digital underwriting and alternative data.
Sectoral Diversification: Increased focus on green finance, agriculture tech, and renewable infrastructure lending.
Public sector banks, in particular, are emphasizing retail and rural credit to maintain balance sheet stability.
6. What Borrowers Are Doing Differently
Borrowers, too, are changing their approach:
Debt Consolidation: Taking fewer but larger loans to manage interest and simplify EMIs.
Switching to Fixed Rates: To protect against potential rate hikes.
Leveraging Co-Lending and NBFCs: For faster approvals and flexible terms.
Investing in Assets Instead of Credit: Rising gold, equity, and fixed-deposit investments suggest a tilt toward savings.
Financial literacy campaigns by the government and banks have also helped people make informed credit choices.
7. Outlook: Will Loan Demand Rebound Soon?
Experts believe the current phase is a temporary slowdown, not a structural decline.
If inflation stabilizes and the RBI signals rate cuts in 2026, loan demand could see a sharp revival—especially in housing, MSME, and consumer durable segments.
Additionally, the digital credit revolution, powered by UPI, Account Aggregator, and AI-driven lending, may help re-energize growth.
In the meantime, India’s financial sector appears to be entering a “healthy pause”—one focused on quality over quantity in credit growth.
FAQs :
1. Why is loan demand stagnating in India?
High interest rates, cautious consumers, and slower corporate borrowing have contributed to the current stagnation in loan demand.
2. How are banks responding to the slowdown?
Banks are focusing on digital lending, risk management, and new customer segments like rural credit and green finance.
3. Are borrowers avoiding loans now?
Yes, many individuals are prioritizing repaying old loans and improving credit scores before taking on new liabilities.
4. Will loan demand recover in 2026?
If the RBI begins to cut rates and inflation stabilizes, credit demand could rise again, especially in retail and MSME sectors.
5. Which loan segments are most affected?
Home, auto, and personal loans have seen the biggest slowdown, while small business credit remains steady but cautious.
Published on : 14th October
Published by : SMITA
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