In a sharp reversal from the aggressive post-COVID lending boom, India’s retail credit growth slowed to 5% year-on-year in the March 2025 quarter, as per data from leading financial institutions. This marks the lowest quarterly growth rate in the past three years, primarily driven by a slump in home loan demand and credit card usage.

The retail credit segment, once the backbone of India’s consumption story, is now reflecting signs of consumer caution, rising interest rates, and tighter lending norms.

Key Highlights

- Retail credit growth moderated to 5% YoY in Q4 FY25.

- Home loans, which constitute the largest retail segment, saw a significant pullback.

- Credit card spending and outstanding balances declined as consumers became cautious.

- NBFCs and private banks are re-evaluating risk models and tightening underwriting standards.

What’s Behind the Slowdown?

1. High Interest Rates

With the RBI maintaining a tight monetary stance, borrowing has become costlier. The home loan interest rates hovering around 9–10% have discouraged new buyers, especially in Tier-2 and Tier-3 cities.

2. Consumer Caution

Post-pandemic recovery fatigue, inflationary pressures, and uncertainty in job markets have made consumers more cautious in taking on fresh debt.

3. Stricter Lending Norms

Banks and NBFCs have tightened credit norms, especially for unsecured lending like personal loans and credit cards, following RBI’s risk-weight adjustments announced late last year.

Home Loans See Significant Pullback

Home loans, traditionally the largest contributor to retail credit, witnessed a sharp slowdown:

- Growth dropped to 3.2%, compared to 12% in the same quarter last year.

- Rising property prices and higher interest rates (now hovering around 9–10%) have made borrowing expensive.

- Delayed home-buying decisions, especially in urban areas, contributed to the fall in demand.

Credit Card Usage Dips

Credit card outstanding balances, which had been growing steadily over the past few years, also took a hit:

- Credit card growth slowed to under 2%, as many consumers opted to cut back on discretionary spending.

- RBI’s stricter risk norms for unsecured lending have led banks to tighten approval criteria, reducing the number of new credit cards issued.

- Users are shifting toward UPI and debit card transactions for routine purchases.

Other Retail Segments Show Mixed Trends

- Personal Loans: Growth remained flat as lenders became more selective.

- Auto Loans: This segment fared better, growing around 6.5%, supported by strong rural demand and new vehicle launches.

- Education Loans: Continued to grow modestly, particularly for overseas studies.

Expert Take

“The retail credit sector is undergoing a healthy recalibration. A temporary slowdown is necessary for long-term stability, especially in high-risk lending segments,” said Ramesh Iyer, CEO of a leading NBFC.

What Does This Mean for the Economy?

Retail credit is closely linked to consumer spending, which fuels economic growth. A decline in borrowing typically suggests that:

- Consumers are delaying big-ticket purchases like homes and cars.

- The economy may witness a dip in domestic consumption in the near term.

- Financial institutions are prioritizing asset quality over aggressive growth.

However, some experts view this correction as healthy and necessary after years of rapid, and at times, risky retail loan expansion.

Outlook for the Coming Quarters

Economists believe retail credit growth may stay muted in the first half of FY26 but is likely to recover in the second half as:

- Interest rates stabilize or begin to fall.

- Consumer confidence returns with better employment and income visibility.

- Digital lending and fintech platforms expand access to underbanked areas.

Conclusion

The 5% growth in retail credit in the March 2025 quarter marks a cautious phase for India’s lending ecosystem. While this slowdown highlights short-term concerns, it may also lay the foundation for more responsible, risk-aware lending in the future.

For borrowers, this means more scrutiny but also better-targeted loans. For lenders, this is a time to revisit credit strategies and ensure long-term sustainability.

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