Indian Banks Experience Slower Loan Growth Amid Regulatory Changes

In February, Indian banks saw a notable slowdown in loan growth, marking the eighth consecutive month of moderation. According to recent data from the Reserve Bank of India (RBI), the year-on-year increase in credit was 12%, a decrease from 16.6% in the same month last year. This decline is largely attributed to a drop in personal and credit card loans, following the implementation of stricter guidelines by the RBI.

Factors Driving Slower Loan Growth

• Regulatory Changes: The RBI’s intervention in late 2023 introduced tougher capital requirements for personal loans, credit card loans, and loans to non-banking finance companies (NBFCs).
• Impact of Mergers: When factoring in the merger of HDFC Bank with its parent company, Housing Development Finance Corp, the overall loan growth for February was 11%, down from 20.5% the previous year.

The trend continued from January, where the loan growth rate was recorded at 12.5%, excluding the merger, and 11.4% when including it. The once-booming demand for unsecured retail loans, which fueled rapid growth in the banking sector, is now facing headwinds.

Personal and Credit Card Loans Decline

The decline in personal loans is particularly striking. Growth dropped to 8.4% in February, down from 19.5% last year, excluding the merger effects. Similarly, the growth rate for outstanding credit card debt plummeted to 11.2% from 31%.

• Service Sector Loans: Credit growth in the services sector also took a hit, slowing to 13% in February compared to 21.4% the previous year. This deceleration is primarily due to reduced lending to NBFCs, which are crucial players in the credit market.

Industry Loan Growth

In contrast, loans to industries saw a modest increase of 7.3% last month, although this figure is lower than the 8.4% recorded a year prior. Banks are adjusting their lending strategies, focusing on optimizing their credit-deposit ratios in a competitive market that’s seeing a rush to attract deposits.

Looking Ahead: Potential for Recovery

Interestingly, the RBI relaxed some of its capital requirement rules last month, signaling a potential shift in the lending landscape since Sanjay Malhotra took over as the governor in December. While analysts believe this change could positively influence the economy, it may take some time before the benefits are felt.

In summary, while the current loan growth figures reflect caution among Indian banks, regulatory adjustments may pave the way for a recovery in the coming months. Keeping an eye on these developments will be crucial for understanding the future trajectory of India’s banking sector.