Currently, the banking industry has not seen the necessary credit growth, even after the RBI’s repo rate reduction by over 100 basis points. Typically, this should lower borrowing costs and significantly increase demand for bank loans. However, the slower credit growth compared to last year may stem from weak demand for new investments and project expansions. Capacity utilization has not improved sufficiently to drive demand for new term loans. Additionally, demand for fresh working capital loans has been limited due to subdued consumer demand. Another contributing factor is that, aside from loans that were automatically repriced due to repo rate cuts (linked to market benchmarks), other loans have not seen adequate transmission of lower rates.
If banks cannot offer better lending rates because their previously contracted deposit rates, especially on long-term deposits, are still high, their ability to pass on lower rates to new borrowers is restricted due to concerns about shrinking net interest margins and profitability. In this context, RBI Governor Sanjay Malhotra indicated that while credit growth slowed in 2024-25, the overall flow of financial resources to the commercial sector has improved significantly. Thus, the decline in corporate borrowing should not be viewed in isolation. He noted that the total flow of financial resources to the commercial sector increased from Rs 33.9 trillion in 2023-24 to Rs 34.8 trillion in 2024-25 and stated that this trend is continuing into the current financial year.
According to the RBI’s definition, this flow includes bank loans, non-bank loans, LIC investments in corporate debt, and overseas funds. Corporates frequently raise funds directly from the market when conditions are favorable, utilizing instruments like commercial papers, and various debt instruments, as well as equity resources through fresh issues, rights issues, and private placements. Many corporates, having strong profitability, may repay high-cost bank loans when there are no acquisition or investment opportunities. It is generally anticipated that lower interest rates should enhance credit growth; however, there is often a delay between repo rate cuts and increased credit demand.
For instance, BCG research indicates that credit growth did not rise even after 12-24 months of falling interest rates between 2014 and 2016. A study by Deep Narayan Mukherjee, Gopal Sharma, Kanishka Singh, and Pooja Kaphalia found that from 2018 to 2020, despite stable or declining interest rates, credit growth did not accelerate. In contrast, credit expanded robustly between 2022 and 2023, despite rising interest rates. The BCG study noted that 2016-2018 was the only period where credit growth matched falling interest rates. To create a level playing field, the government has previously incentivized corporates by reducing corporate tax rates.
Recently, the Union Budget provided significant benefits to individuals by raising income tax exemption limits, which has increased disposable income and encouraged spending on consumption, tourism, and luxury items, thereby boosting domestic demand. Furthermore, Prime Minister Narendra Modi announced GST 2.0 reforms effective September 2, introducing two slabs – 5 percent for essential items and 18 percent for others, replacing the previous four slabs. This is expected to significantly enhance consumption and economic activity. Although the reforms may reduce government GST revenues by Rs 48,000 crore, SBI estimates that the actual loss will be minimal (around Rs 3,700 crore) as increased economic activity and consumption will partially offset the shortfall.
SBI also projects that these reforms could reduce inflation by 65-75 basis points in FY27. Moreover, these changes may lead to higher capacity utilization, prompting corporates to initiate new capital expenditures, boosting demand for bank credit. Recently, SBI Chairman C S Setty emphasized that sustained consumption is critical for driving private capital expenditures, as corporates are already operating at around 75 percent capacity utilization. Expansion in sectors like renewable energy, refineries, cement, and steel depends on a revival of demand. He also mentioned that many large companies are currently funding their capex needs through internal cash reserves and capital markets, explaining the subdued demand for bank credit.
Another concern for the banking sector is the downward trend in CASA (current account and savings account) deposits. Following the repo rate cut, banks, including SBI, lowered the interest rates on savings accounts. SBI’s uniform SB interest rate has been 2.5 percent annually since June 2025. Consequently, SBI’s CASA ratio slightly declined to 39.36 percent in June 2025 from 40.70 percent a year prior and from 39.97 percent in the previous quarter. Similarly, Bank of Baroda’s CASA ratio decreased by 64 basis points to 39.33 percent in the June quarter. To protect their net interest margins, banks have reduced SB deposit rates, as the cost of term deposits (locked in at higher rates earlier) takes time to adjust downward.
While this supports asset-liability management, it makes SB deposits less appealing to customers. Therefore, banks must enhance their SB customer base through special campaigns, value-added services, technology-enabled products, cross-selling, and stronger customer engagement. At the recent two-day PSB Manthan, the government urged banks to improve CASA deposits, enabling them to extend more competitive credit to vital sectors of the economy, particularly agriculture and micro, small, and medium enterprises (MSMEs), which are essential for inclusive growth. As of June 2025, Indian banks experienced a 10.2 percent year-on-year growth in non-food bank credit, down from 13.8 percent in June 2024. Credit to agriculture and allied activities rose by 6.8 percent year-on-year, a decrease from 17.4 percent a year earlier.
Credit to industry recorded modest growth of 6.8 percent in June 2025 compared to 7.7 percent the previous year. Credit to MSMEs continued to grow steadily, while credit to the services sector moderated to 9.6 percent year-on-year, down from 15.1 percent a year ago. Personal loans also slowed to 14.7 percent from 16.6 percent in the same period last year. These figures emphasize the declining trend in credit growth, a crucial indicator of economic expansion. With India’s credit-to-GDP ratio at approximately 65-70 percent—significantly lower than the 100 percent plus levels seen in most developed nations—there is an urgent need to enhance credit to productive sectors as India aims for Viksit Bharat by 2047.