Will RBI's Jumbo Easing Lead To A Credit Revival?

Favourable policy actions can create the necessary conditions, but are not sufficient to stimulate bank lending

- howindialives.com

Inflation is under control, and we can assume that we have won the war...growth is good, but there is still room for improvement." That was central bank governor Sanjay Malhotra in June after cutting the repo rate—the rate at which the central bank lends to banks—by 0.50 percentage point. It was unexpected. It was big. It marked the culmination of the battle against inflation that started in April 2022 and was intended to increase lending in the economy.

It was a continuation of a process the Reserve Bank of India (RBI), under Malhotra, began this February. The RBI infused massive liquidity into the system and effected a series of rate cuts, signalling lower interest rates. This should have been the start of a new, long-awaited credit revival. Instead, so far in 2025, year-on-year (y-o-y) growth in bank credit has stayed in the 9-11% band, a significant drop from the 15-16% highs of a year ago.

Is this a wait for the pieces to come together or has the credit pick-up failed to even start?

Prior to this ongoing phase of easier money, some part of the credit slowdown was intended. In November 2023, the RBI tightened lending norms for unsecured personal loans (chiefly, credit card loans) and loans to non-banking finance companies (NBFCs), and subsequently for micro-finance loans. Its objective was to curb excessive lending by these sectors, which were showing rising loan defaults. The clampdown was effective. Y-o-y growth in outstanding NBFC loans fell from 30% in March 2023 to 5.7% in March 2025, and that in outstanding credit card loans from 32.5% to 10.6%.

Unfortunately, the pace of lending to other sectors has also slowed. Overall, bank credit to industry grew 7.8% y-o-y in March 2025, against 8.5% in March 2024. Industry is a relatively low-growth component of bank loan books. Loans to households and service sector enterprises have grown much faster in the last decade, and now form 50-60% of total credit deployment.