Introduction
India’s loan growth slowdown is a key financial trend impacting borrowers in 2025.Over the past few years, India’s credit market witnessed a steady surge in loan demand across retail, corporate, and MSME segments. However, recent data suggests that India’s loan growth has slowed down significantly, raising concerns among borrowers and lenders alike.
With increasing interest rates, stringent credit policies, and evolving borrower behavior, India’s loan growth is now facing a change in its growth curve. But what does this slowdown imply for borrowers? Will they have to face tougher lending terms, increased EMIs, or less credit availability? This article discusses the primary drivers of the slowdown in India’s loan growth and how it can affect borrowers in 2025.
Table of Contents
Comprehending the Loan Growth Slowdown
India’s loan growth has traditionally seen double-digit growth, spearheaded by strong demand for personal loans, housing loans, and business credit. Yet, in the financial year 2024-25, figures from the Reserve Bank of India (RBI) reflected sharply slower loan growth in India, particularly in categories such as housing, MSMEs, and corporate lending.
A. Slowing Retail Loan Growth
Retail loans, such as personal loans, auto loans, and credit card loans, have been a prime mover of India’s loan growth in the last few years. A combination of higher interest rates and tighter credit checks has, however, resulted in a weakening of retail loan disbursements.
- Home loans: Increased EMIs because of higher interest rates have deterred several first-time home buyers, and housing loan sanctioning has seen a decrease.
- Auto loans: With the rising price of cars and larger financing rates, demand for auto loans has softened.
- Personal loans: Increased interest rates and tighter checking of borrower profiles have hammered the growth of unsecured personal loans, further impacting India’s loan growth.
B. Corporate Loan Slowdown
Corporate loan growth has also seen a slowdown as a result of weak business confidence, delayed investment, and prudent lending by banks. Large corporate borrowers, which normally contribute the lion’s share of India’s loan growth, have reduced their borrowing activity amidst global economic uncertainties.
- Slumping Capital Expenditure: Corporates have put their expansion plans on the backburner on account of expensive borrowing and global market volatility.
- Decreased Working Capital Requirement: As companies simplify their businesses to save money, working capital loan demand has decreased, adding to the deceleration of India’s loan growth.
C. MSME Credit Crunch
Micro, Small, and Medium Enterprises (MSMEs) that are a major contributor to India’s economy have also been significantly affected by subdued credit offtake. More stringent norms and tighter credit appraisal have resulted in delayed loan disbursement to this segment and are affecting India’s loan growth.
- Limited Collateral: Most MSMEs find it difficult to provide the high collateral requirements of banks.
- Higher Rejections: Higher rejection rates are seen among MSME borrowers with shorter credit history, which is responsible for the slowing loan growth in India.
Principal Causes of the Slowing of the Loan Growth
The slowing in India’s loan growth is brought about by a combination of local and international reasons. By identifying these causes, borrowers can project changes in the lending environment.
A. Climbing Interest Rates
One of the key reasons behind the slowdown is the RBI increasing interest rates to curb inflation. The RBI over the last twelve months has resorted to a string of interest rate hikes, which has put borrowing costs for consumers and corporations higher, weighing on India’s loan growth.
- Effect on Home Loans: Increased interest rates have increased the cost of home loans, making them less affordable, and hence there is a decline in demand from potential buyers.
- Effect on Corporate Borrowing: Corporates are postponing their plans for expansion because of the increased cost of capital, resulting in lower demand for business loans and slowing down India’s loan growth.
B. Tighter Lending Standards
Due to increasing defaults and credit quality concerns, banks and financial institutions have implemented tighter credit appraisal procedures. This has resulted in a decrease in the loan approval rate, especially for high-risk customers, and has helped to slow India’s loan growth.
- Tighter KYC and documentation norms have made it harder for MSMEs and small businesses to obtain credit.
- Greater scrutiny of borrower profiles has led to longer processing periods and lower acceptance rates, derailing India’s loan growth.
C. Global Economic Uncertainty
Global economic uncertainties in the form of geopolitical tensions, supply chain disruptions, and concerns over inflation have resulted in risk aversion lending by banks. Most businesses are going in for a wait-and-watch strategy, delaying expansion plans, and decelerating their credit dependence, further impacting India’s loan growth.
Impact of Slowing Loan Growth on Borrowers
As Indian loan growth decelerates, borrowers will likely go through major changes in the lending scenario. Here’s how this slowdown can affect various types of borrowers:
A. Higher Interest Rates and EMIs
With the RBI keeping a tight grip on monetary policy, interest rates are likely to continue high in 2025. For loan-seekers with existing loans, it means increased EMIs and longer loan periods, affecting aggregate demand and leading to the slowdown in India’s credit growth.
B. Tighter Credit Approval Terms
Borrowers are likely to face tighter credit scrutiny and documentation as banks get risk-averse about lending. This is expected to continue the slowdown in India’s loan growth.
Opportunities During the Slowdown
Though the slowdown in India’s loan growth poses a challenge, it also provides opportunities for borrowers to look at alternative sources of finance and become more cautious with their finances.
A. Looking at Digital Lending Platforms
With the emergence of fintech platforms and online lenders, borrowers have greater choice to obtain credit rapidly and conveniently. These platforms may be able to offset the impact of decelerating India’s loan growth by providing more affordable financing alternatives.
How Borrowers Can Adapt to Changing Credit Conditions
The borrowers must take a strategic route while coping with the changing credit landscape in India. This is how they can prepare for the changes introduced by the slowdown of India’s loan growth:
A. Compare Loan Options Carefully
With shifting interest rate scenarios, the borrowers must compare loan deals offered by various banks and financial institutions in order to determine the best terms and counteract the effects of slowing India’s loan growth.
Conclusion: Adapting to a Changing Credit Landscape
India’s loan growth is seeing a significant slowdown, affecting borrowers in different segments. Though higher interest rates, tighter credit standards, and lower availability of loans can be challenging, effective financial planning and considering alternative financing solutions can assist borrowers in adapting to these changes successfully.
By being well-versed with changing market trends, loan comparison, and a good credit history, the borrowers can make informed choices and adjust to India’s shifting credit environment with ease, even in the face of a slowdown in India’s loan growth.