All isn’t well on the banking street as credit growth, margins head south
However, services and retail loans have now become the prime drivers of loan growth, with an incremental contribution of 30.3% and 44.7% in May compared to 33.7% and 36.7% in March, respectively.
The agency continues to expect credit growth of 13% for FY26, with a revival in lending to NBFCs and retail sector, in addition to the lower yield curve supporting corporate disbursements.
Describing deposit accretion a structural concern, He says since FY22, deposit growth has consistently lagged credit growth by an average of about 380 bps, pushing LDR to 80.3% in FY25 from 70% in FY21. Systemic efficiency, active liquidity management and emerging investment products that offer higher returns and replace the stability offered by fixed deposits, are likely to persist in the medium term.
The narrowing gap between loan and deposit growth is evident from the moderation in incremental LDR to 29% and 77% as of July 11 from 54% and 96% a year ago, respectively.
Ruling out largest concerns on the asset quality side, as the stress is mostly limited to unsecured retail credit only, the report says at the system level asset quality has improved to a decadal low in FY25, with gross non-performing assets falling to 2.3% and net non-performing assets at 0.5%.
However, stress in unsecured retail credit, especially among private sector banks remains evident, particularly in personal loans, credit cards, and microfinance.
The November 2023 RBI advisory also led to a slowdown in unsecured retail loan growth to 11.6% now from 27% during September 2021-September 2023, though this segment still as of May 2025 accounts for 32.3% of the total retail loans and 11.3% of total advances, with GNPA rising to 1.8% in FY25 from 1.6% in FY23 and FY24.
Though, secured retail segments such as mortgages (50.1% of retail) and vehicle finance (10.5% of retail) remains stable, with the system-wide stress data for unsecured retail has been steady in the 7-8% range over FY23-FY25.