Banking Sector Update : Sprints turn into marathon By Elara Capital
Sprints turn into marathon
The Reserve Bank of India (RBI), in its latest print for May 2025, continues to report soft overall loan growth of ~9% YoY (single-digit growth reported since March 2022). Within segments, agriculture grew 7.5% YoY, services 8.8% YoY, retail 11.1% YoY and industry 4.8% YoY. Retail growth, although still in the double digits, has cooled markedly from >20% levels in FY23. With this, the retail share currently forms ~33% of system credit, up from 19% in FY15, while the industry share has slipped further to ~21% from 44 % in FY15.
We observe four MoM trends: 1) unsecured revival – credit card book grew 1.2% MoM, consumer durables by 1.9% MoM and other personal loans by 0.9% MoM, 2) gold-backed lending still on a tear – jumped 12.7% MoM (~6.9% MoM in the previous month), taking YoY growth past ~115%, 3) NBFC drag – banks’ lending to NBFC (HFC & PFI) contracted ~3% MoM, reversing the post-RWA cut bounce, and 4) micro-led industry uptick – even as industry growth remains subdued at negative 0.4% with large industries declining by 1.9% MoM, and micro industries grew by 4.8% MoM. Overall loan growth is witnessing a broad-based slowdown, lower than our expectations. Moreover, a recent NSO survey indicates a likely drop in private sector capex after an uptick in FY25, suggesting a meaningful revival in sectoral growth from large industries may still take time. However, the RBI’s recent progrowth stance may help ease pressure, but we believe recovery will be prolonged.
Retail loan growth slower; gold loans robust: Retail growth came in at 11.1% YoY and 1.4% MoM. Unsecured retail growth, which witnessed a slowdown due to macro tailwinds, saw uptick MoM across buckets (credit cards, consumer durables and other personal loans). With this, unsecured retail formed 30.4% of retail credit and 10% of overall. Housing loans grew 9% YoY, constituting ~50% of retail loans. Growth in vehicular loans moderated to 5.6% YoY. Education loans were another segment that grew 14.1% YoY and 0.5% MoM. A segment that continues to grow is gold loans, up >115% YoY, on low base. We see this as monitorable, given the change in rules.
Services hold up; momentum slows for NBFC: Services grew 8.7% YoY and remains flat MoM. The NBFC segment witnessed a slowdown of 0.3% YoY; within, HFC contracted 6.8% YoY while PFI saw faster deceleration by 8.6% MoM. Among other segments, computer software and wholesale trade posted an uptick of 1.5% QoQ while others saw sub-1% MoM growth.
Subdued industry growth: Industry growth moderated to 4.8% YoY (7.2% in March 2025) and negative 0.4% MoM, led by growth in medium industries, up 16.8% YoY and flat MoM, and micro-industries growth of 13.7% YoY and 4.8% MoM whereas large enterprises, post growth of 1.7% MoM in March, moderated to negative 1.9% MoM in May. With system growth now at sub-10% YoY, incremental spread may come under pressure, nudging lenders to protect ROA. Overall loan growth is decelerating faster than expected. Recovery would remain protracted until private sector capex gains meaningful traction.
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