MUMBAI: Retail credit growth of banks slowed sharply to 12% in January 2025, down from 29% in January last year, driven by weaker growth in personal loans. Growth in other personal loans, which include unsecured loans, declined to 9% in January 2025 from 23% in January 2024, according to Reserve Bank of India (RBI) data. However, consumer durable loans saw a slight 2% year-on-year decline in January 2025, while credit card spending growth eased to 13% from 31% over the same period.
“Slowdown in retail credit reflects the impact of hardening of interest rates and increase of risk weights on unsecured loans. Over the past year, interest rates on retail loans -including home, vehicle, and personal loans- have risen significantly, deterring potential borrowers from seeking new credit,” said the head of retail credit of the private bank. “Banks have adopted a more cautious approach to unsecured loans in response to concerns raised by the Reserve Bank of India regarding personal loans”.
RBI former governor Shaktikanta Das had expressed concerns about unbridled growth in personal loans and advised lenders to go slow on unsecured loans. The banking sector regulator decided to increase risk weights on unsecured loans in November 2023 and directed banks and non-banking financial companies to reserve more capital for risk weights. The mandatory risk weight requirement was increased by 25 percentage points and is applicable to unsecured personal loans, credit cards and lending to NBFCs.
The RBI on February 25 this year, announced to reduce risk weights on bank loans to NBFCs and microfinance loans to 100% from 125 % earlier. However, it has retained the risk weights for unsecured loans at the same level. An increase in risk weights makes it more expensive for banks to lend as they are required to set aside more capital for such loans.
“We expect personal loan growth to rebound in the next financial year. The new RBI governor has stated that no moderation in personal loans is required, which should offer banks some reassurance,” said a senior official from a public sector bank. “Banks are now waiting for the reduction in risk weights for unsecured loans. Hopes are high after RBI reduced risk weights for NBFC loans”.
Apart from personal loans, significant moderation is also visible in home, vehicle and education loans. Home loans growth declined 11% to `29.5 lakh crore as on January end this year compared to 37% growth seen in January 2024. Similarly, vehicle loans growth declined 10% to `6.2 lakh crore as on January end this year compared to 16% growth seen in January 2024.
Gold loans have bucked the trend by registering strong growth. Loan against jewellery surged 77% to `1.8 lakh crore as of January end compared to 17% in the same month last year. Growth in loan against gold jewellery has maintained a strong momentum due to an increase in prices of gold.
Source: The Financial Express
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