Credit Growth Hits 3-Year Low, Drops to 8.97% in May 2025

India’s banking sector is experiencing a pronounced shift in credit dynamics, with growth in lending slowing to its weakest pace in 3 years. This cautious lending approach by financial institutions comes in response to growing stress in unsecured and microfinance segments, combined with regulatory measures aimed at improving financial stability. As banks focus on safeguarding asset quality, deposit growth continues to outpace credit expansion, reshaping the liquidity profile of the system.

Credit Growth Drops Below 9% for First Time Since 2022

Systemic credit growth fell to 8.97% year-on-year (YoY) in the fortnight ended May 30, marking its lowest level in 3 years. This decline is primarily attributed to lenders becoming more selective, focusing on risk mitigation rather than aggressive expansion, especially in the face of rising stress in the microfinance and unsecured lending segments. The last time credit growth was below 9% was in March 2022.

Data from the Reserve Bank of India (RBI) revealed that total credit in the system stood at ₹182.8 trillion, while total deposits amounted to ₹231.7 trillion. In the fortnight under review, credit rose by ₹59,885 crore, whereas deposits surged by ₹2.84 trillion. Deposit growth, at 9.9% YoY, has outpaced credit growth by 100 basis points (bps).

Loan-Deposit Ratio Moderates as Deposit Base Expands

The slower credit growth has moderated the outstanding loan-deposit ratio (LDR) to 78.9%, while the incremental LDR has dropped to 72.7%, down from 98.8% a year ago. During the same period last year, credit growth had exceeded deposit growth by 700 bps, which had led to concerns from the RBI about the rising LDR across the banking system. The central bank had consistently urged banks to maintain a balance and reduce reliance on aggressive lending.

Since July last year, credit expansion has cooled from the high double-digit rates witnessed in 2024, influenced by regulatory actions such as higher risk weights on loans to non-banking financial companies and unsecured lending categories like personal loans and credit cards. Interest rates stayed elevated until February, after which the RBI’s Monetary Policy Committee (MPC) began its easing cycle, slashing the repo rate by 100 bps in total this year. As a result, many corporations turned to overseas and domestic debt markets, finding borrowing terms more favourable than those offered by banks. Industry observers believe further rate cuts may help revive traditional bank lending. 

Read More: Bank Credit Growth Slows to 12% in FY25 Amid Regulatory Curbs!

Conclusion

India’s banking sector is undergoing a phase of recalibration as lenders strike a balance between growth and prudence. While deposit mobilisation remains strong and interest rates soften, the revival of broad-based credit growth will depend on further rate transmission and the return of borrower confidence in traditional banking channels.

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