India Banks- Jul'25 update by JM Financial Services Ltd
Pick-up in credit growth; PSUs raise rates on fresh loan & NBFC yield hardens
According to the latest fortnightly data (as of 8th Aug’25), system credit growth inched up to 10.2% YoY (vs. 9.9% YoY in 11th Jul’25) , while deposit growth was steady at 10.1% YoY. RBI’s sectoral credit data shows system credit growth improving to 9.9% YoY in Jul’25 (vs. 9.3% in Jun’25), led by broad-based pickup across segments barring retail. MSME credit growth accelerated to 19.1% YoY (vs. 17.4% in Jun), while services and agri credit growth also improved to 10.6% and 7.3% YoY, respectively. Retail loan growth moderated slightly to 11.9% YoY (vs. 12.1% in Jun), led by slower vehicle/unsecured loan growth (~8.9%/8.0% vs. 10.8%/8.6% in Jun). Credit to NBFCs remained muted at ~3% YoY.
RBI, in its recent policy meeting, held policy rates steady, partly to ensure that the effects of the earlier front-loaded cuts get transmitted. However, on a MoM basis, banks raised lending rates on fresh loans by ~18bps (PSU/FB up ~31/18bps MoM, Pvt banks down ~16bps MoM), while WADTDR on fresh deposits has been cut by ~8–21bps across all banks, which should help ease pressure on NIMs. In Jul’25, the gap between lending and deposit rates on fresh loans has improved for PSU banks by ~48bps MoM, much higher than ~5bps for Pvt. banks. On O/s basis as well, the gap between lending and deposit rates has improved by ~5bps MoM for PSU banks and declined by 5bps MoM for Private banks. Large banks have also kept the 1-3Y TD rates largely steady MoM after ~55-90bps cumulative cuts since Feb’25.
Yields rose last month with NBFC AAA bond yield rising by ~15-20bps MoM and NBFC AA bond yield rising by ~20-30bps MoM, which may put pressure on cost of funds for NBFCs.
We prefer banks over NBFCs in financials and continue to prefer large banks in banks given given their stronger return profiles, better liability franchises, lower asset quality risk and attractive valuations relative to growth. Our preferred names in banks are: ICICI, HDFC Bank, SBI, Axis and CUBK.
* Segment-wise loan growth trends: System retail credit growth moderated to 11.9% YoY in Jul’25 (vs 12.1% YoY in Jun’25). This was primarily led by a decline in the vehicle loan growth to 8.9% YoY (vs. 10.8% YoY in Jun’25). Housing loan (HLs) growth was flat at 9.6% YoY. Within housing, priority HLs grew sharply at ~26% YoY (vs. ~14% YoY in Jun’ 25). This was, however, offset by a sharp decline in non-priority HLs growth to ~4% (vs. 8% YoY in Jun’25). Unsecured retail loans growth declined to 8.0% YoY (vs. 8.6% YoY in Jun-25). Overall credit growth was supported by credit to MSMEs growing at 19.1% YoY (25-month high, vs. 17.4% YoY in Jun’25) and loans to services growing at 10.6% YoY (vs. 9% YoY in Jun’25). Notably, MSME credit growth continues to grow despite emerging concerns around stress in the segment. Agricultural credit inched up to 7.3% YoY (vs. 6.8% YoY in Jun ’25). Industrial credit growth also inched up to 6% YoY (vs 5.5% YoY in Jun ’25). However, despite the RBI’s revision of risk weights on loans to NBFCs in Feb ’25, credit growth to NBFCs was flat at ~3% YoY.
* System liquidity remains in surplus; Yields rise: System liquidity remained in a surplus of ~INR 2.4trln as of end-Aug ’25. The first 25bps cut in CRR requirement is expected to begin from 6 th Sep, which should further boost liquidity and aid credit growth. FX reserves fell MoM to USD 691bn as of 22nd Aug’25 (vs. USD 698bn as of 25th Jul’25). Currency-incirculation inched up to INR ~37.9trln as of 15th Aug’25 (vs. INR 37.7trln as of 18th Jul’25). As of Aug’25, the benchmark 10-year G-sec yield inched up 19bps MoM to 6.6%, while US 10-year declined by 15bps MoM to 4.2%; as a result, the spread between G-sec and US Treasury yield rose by 34bps to 235bps (vs. ~200bps in Jul’25). The rise in G-Sec yields indicates the bond market is factoring in an end to the rate cut cycle.
* Our view: We retain a preference for large private banks over mid-size banks/NBFCs given their stronger return profiles, better liability franchises, lower asset quality risk and attractive valuations relative to growth. Our pecking order is ICICI, HDFC Bank, SBI, Axis and CUBK.
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