Retail Loan Slowdown: Where Are The Consumers?

This is not entirely unexpected. Even when the January 2025 monthly results were out, retail credit growth decelerated to 12 per cent, compared to 29 per cent in January 2024.

Why is retail credit growth not expanding as desired by the policymakers?

It is a combination of factors like regulatory interventions, tighter liquidity, relatively higher borrowing costs and banks’ conscious effort to shift towards sustainable profitability in balance sheets from the strategy of aggressive expansion.

Of course, there have been concerns expressed about the lack of consumer demand, pricing challenges in the domestic economy, the current turmoil around the trade wars, the lack of new investment, the squeezing of employment opportunities and so on. All these elements possibly aggravated this slowdown in credit offtake by common customers of the bank.

This is not entirely unexpected. "We expect credit growth to moderate in fiscal 2025 due to expected slowdown in unsecured retail loans following the RBI [regulatory] action and continued liquidity pressure," said Anand Dama, senior research analyst at Emkay Global Financial Services Ltd, last year.

He expected loan growth to moderate to between 12 per cent and 13 per cent by March 31, 2025. Now, one can see that his guesses are near to the actual figures.

Usually, the January-March quarter (or Q4) is economically the most active one of the financial year, when the businesses execute expansion plans. But it seems that there is a break in that pattern this time around.

In the April 2025 Monetary Policy Committee (MPC) meeting, the Reserve Bank of India (RBI) cut the benchmark repo rate by 0.25 per cent for the second successive time. Among other reasons, this was done to encourage common retail customers and industries to take more loans. However, the effect may take longer.

The retail loans from banks include credit cards, personal loans, home loans, vehicle loans, education loans, and gold loans.

Q4 Financial Results Show Brakes On Retail Credit

ICICI Bank, the second-largest after the SBI, witnessed slower year-on-year retail loan growth in Q4 of 2024-25, at 8.9 per cent compared to 19 per cent last year. To put it into context, the bank’s retail portfolio was 43.8 per cent of the total portfolio at the end of 2024-25.

Retail loans extended by Axis Bank grew 7 per cent year-on-year in Q4 of 2024-25 at Rs 622,897 crore. Retail loans accounted for 60 per cent of the net advances (or credit provided) of the bank. While home loans experienced a paltry 1 per cent growth, credit card advances grew 4 per cent year-on-year.

The merged entity IDFC First Bank’s retail finance credit grew 18.7 per cent in Q4 of 2024-25, down from 31 per cent growth last year. Home loans and credit card loans show 21.8 per cent and 35.5 per cent growth, respectively. The size of the bank’s retail loan portfolio, however, is smaller compared to others, at Rs 141,406 crore.

RBL Bank, a relatively new kid on the block, managed to grow its retail advances by 13 per cent. Still, the growth is less than half of the 30 per cent growth last year. Notable fact is: the bank’s secured retail advances (with collateral or mortgages) grew 43 per cent year-on-year. The portfolio size is smaller than others at Rs 55,703 crore.

The beleaguered Yes Bank experienced a shrinking of its retail credit portfolio by 3.4 per cent in Q4 of 2024-25, compared to 16 per cent growth in the previous year. Retail portfolio, as a percentage of total advances, has also decreased to 41.3 per cent from 46.1 per cent last year.

What Does This Slowdown Mean?

The RBI hiked the risk weights on unsecured personal loans and credit cards by 25 percentage points by the end of 2023. As a result, the banks had to keep additional capital in their balance sheets for such loans to avoid the bad loan trap. Over the next year, the banks took a cautious approach to lending to these prime retail segments. The effect is now showing, and this is likely to hit their profitability.

Growth in unsecured loans (primarily, personal loans and credit cards), as a result, went down to 9 per cent in January 2025 from 23 per cent in January 2024.

High borrowing rates also contributed to this slowdown. Though the benchmark rate is cut in two successive MPC meetings, the positive effect of that on credit offtake always comes with a substantial time lag.

The liquidity also created challenges for the banks. With deposit growth lagging credit growth earlier, the banks were compelled to undertake a strategic slowdown in providing credit. For instance, HDFC Bank’s loan-to-deposit ratio exceeded 107 per cent last year.

Brakes were applied in both secured and unsecured segments of the retail loan for most of the banks. Housing finance loan growth moderated, while vehicle loans stagnated. 

Public sector banks rely less on retail credit, and that is why these banks outperformed their private counterparts in overall loan growth. PSU banks’ overall credit grew 12 per cent, compared to the private sector’s 11 per cent in the October-December quarter of 2024-25.

All these invariably point towards a subdued consumer sentiment, particularly in discretionary spending, that has brought down credit card and consumer durable loans. Stimulating consumer demand, therefore, ideally should be at the top of the policymaking agenda.