The banking system has seen a sharp rise in credit growth, a sign that the economy has strong domestic support amid global uncertainties. A fast‑growing loan book shows businesses are confident and investing, which can boost economic growth.
In the latest quarterly results, 18 listed commercial banks have reported. Most of them showed a sharp increase in their balance sheet growth. According to the Reserve Bank of India (RBI), headline credit growth reached 18% by the end of June 2025, doubling the 9% growth seen in June 2024.
What is encouraging is that this growth comes mainly from business loans, not household loans. The top five private‑sector banks reported corporate loan growth that far exceeded the growth of their retail loan portfolios in the April‑June quarter. Companies with clean, debt‑light balance sheets are investing in factories and operations, which bodes well for lenders and the economy.
Despite the credit surge, banks have struggled to boost earnings from core lending. Banks such as Federal Bank and ICICI Bank managed to raise core revenues and keep interest spreads steady or even improved them. Margins are a key profit indicator, and many banks have not delivered on them in the first quarter.
Why has loan growth not translated into higher earnings? Asset quality remains very good, with fewer bad borrowers and more repayments. Yet net interest income growth for most banks is only in single digits.
The main issue is the lack of low‑cost funding. CASA (current and savings account) deposits are shrinking for most banks, forcing them to rely on costly bulk deposits. Since this deposit slowdown is partly structural, banks must absorb higher interest costs to attract funds.
This creates a period of margin pressure that analysts expect to last through FY27. If the record high gap between credit and deposit growth persists, banks will need to address the tight funding conditions. They could restrain lending, but that would raise borrowing costs at a time the economy cannot afford.
The RBI has not warned about the high loan‑to‑deposit ratios. Instead, it has focused on liquidity coverage ratio (LCR) and has eased macroprudential norms to keep the sector liquid for productive use.
In short, banks may have to accept lower profits to keep lending flowing and support the economy.
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