Loan Growth in India Cools Amid Rising Defaults
India’s banking sector witnessed a slowdown in loan growth during October, according to data released by the central bank on Friday. This cooling trend follows the Reserve Bank of India’s (RBI) efforts to curb what it perceived as excessive lending practices.
Easing Growth Across Sectors
Excluding the impact of HDFC Bank’s merger with its parent company, Housing Development Finance Corp (HDFC), bank loan growth stood at 12.8% year-on-year in October. This figure represents a decline from the 15.4% rise witnessed during the same period last year. Even when factoring in the merger’s impact, loan growth registered 11.5% last month, compared to 20% a year earlier. This deceleration marks a continuing trend as credit growth also weakened in August and September.
This slowdown appears to be a direct result of the RBI’s actions taken earlier this year. Concerned about the escalating risk of bad loans, the central bank implemented stricter capital requirements for banks late in 2023.
From Boom to Caution: The Trajectory of Unsecured Lending
For a significant period, Indian banks enjoyed double-digit credit growth, fueled by vigorous economic expansion and robust urban consumption. Segments like personal and credit card loans, in particular, exhibited exceptional growth exceeding 25% until the central bank governor cautioned against “overconfidence” earlier this year.
In response to rising defaults, particularly in sectors like personal and credit card loans, which had experienced remarkable growth, the RBI initiated a series of enforcement actions against institutions not adhering to regulations. This, coupled with the surge in delinquencies, has contributed to the current cooling of credit growth.
The data shows a marked shift in these previously high-growth areas. Personal loan growth slowed to 11.5% in October compared to nearly 23% a year ago, excluding the impact of mergers. Similarly, outstanding credit card growth fell from 28% a year ago to nearly 17% last month.
Industry Sees Growth While Services Sector Cools
While some sectors experienced a dip in lending, the industrial sector bucked the trend. Lending to industry saw an 8% year-on-year increase in October, exceeding the 4.8% growth recorded in the same month of the previous year.
In contrast, lending to the services sector slowed to just over 14% in October from 20.4% a year ago. This deceleration is primarily attributed to slower growth in lending to non-bank entities within the services sector.
The RBI’s multifaceted approach to curbing excessive lending appears to be taking effect, resulting in a more measured pace of growth across various loan segments. It remains to be seen how these trends will evolve in the coming months and how the Indian banking landscape will adapt to this new lending environment.
* How might the slowdown in loan growth impact investment and consumption levels in India?
## Cooling Loan Growth in India: An Interview
**Host:** Welcome back to the show. Joining us today is [Guest name], a financial expert specializing in Indian market trends. Thank you for being here.
**Guest:** Thank you for having me.
**Host:** Let’s dive into the recent news. India’s loan growth has slowed down significantly in October, according to the Reserve Bank of India. What’s your take on this development?
**Guest:** This slowdown is quite expected and reflects the Reserve Bank’s conscious efforts to rein in what they perceived as excessive lending practices earlier this year. The RBI, concerned about the rising risk of bad loans, imposed stricter capital requirements for banks late in 2023. This move aimed to encourage more prudent lending practices and stabilize the financial system. [[1](https://www.bajajfinserv.in/insights/personal-loan-default)].
**Host:** The article mentions a significant slowdown across sectors, even when factoring in the HDFC Bank merger. What does this tell us about the overall economic climate in India?
**Guest:** The deceleration in loan growth across various sectors indicates a cautious approach adopted by both banks and borrowers. While the RBI’s measures are intended to mitigate risks, they also contribute to stricter lending criteria. Businesses and individuals might find it slightly harder to secure loans, leading to a slowdown in investment and consumption.
**Host:** We’ve seen a period of robust loan growth in India for some time. Does this cooling-off period signal a potential recession?
**Guest:** It’s too early to say definitively. The slowdown is a necessary correction following a period of rapid lending. The overall economic outlook for India remains promising, with strong domestic demand and growth potential. However, the RBI’s continued monitoring and potential future adjustments to monetary policy will play a crucial role in shaping the trajectory of the economy.
**Host:** Thank you for providing your insights, [Guest name]. This is certainly a situation worth watching closely in the coming months.
**Guest:** My pleasure.
