Credit growth and economic growth have always been closely intertwined. Leverage acts as a catalyst, fueling demand and keeping the economic engine running. This is why, whenever central banks observe a slowdown, they often lower interest rates to make borrowing easier, aiming to stimulate economic recovery.
In India, the credit landscape has expanded beyond traditional banks to include Non-Banking Financial Companies (NBFCs) and the corporate bond market. However, analyzing banking sector credit data still offers valuable insights into how the Indian economy has evolved over time.
Source: RBI
Note: The growth in Bank Credit also includes the impact of the merger of HDFC with HDFC Bank. If one removes the impact, total bank credit would have grown by only 10.2%.
As evident in the above chart, credit growth has kept pace with overall GDP growth. However, the composition of today’s credit has shifted significantly compared to a decade ago. The types of borrowers, sectors driving demand, and sources of credit have evolved, reflecting broader changes in the Indian economy and financial landscape.
Check out the table below! The cells marked in yellow have grown much faster than the overall economy.
Banking Credit to major sectors
Source: RBI
Note: The growth in Bank Credit also includes the impact of the merger of HDFC with HDFC Bank. If one removes the impact, total bank credit would have grown by only 10.2% and housing loans by 15.8% CAGR.
Slowdown of Industrial Credit
In the 2000s, India’s economic growth was fueled by a boom in infrastructure, power, and manufacturing sectors, where companies borrowed heavily to fund capital expenditures. However, the slowdown in the 2010s severely impacted many of these over-leveraged companies, leading to widespread loan defaults.
This created a Non-Performing Asset (NPA) crisis for banks, particularly those focused on corporate or wholesale lending, especially PSU Banks. As India’s capex story fell short of expectations, businesses and promoters became cautious about taking on new debt to fund expansions. Instead, they began relying more on internally generated funds (Equity).
Furthermore, larger companies shifted a portion of their borrowing from banks to the bond market. As a result, credit to industries grew at a modest 3.8% CAGR over 10 years, while its share of total bank credit fell sharply, from 42% to just 22%.
Personal Loans on the Rise
While corporate-focused banks struggled during this period, retail-focused banks like HDFC Bank and Kotak Mahindra Bank capitalized on the growing demand for retail lending. They gained significant market share by offering products such as housing loans, credit cards, vehicle loans, and consumer durable loans.
This period also marked a fundamental shift in the Indian economy, moving from an investment- and savings-led model to a consumption-driven one. As consumer demand surged, retail lending became a key driver of economic activity, further solidifying the position of retail-focused banks in the financial sector.
Source: RBI
A prime example of this surge in consumerism is the recent launch of the iPhone 16. I came across a video showing people lining up for hours at the Apple store in BKC, Mumbai, eager to buy the new phone—many financing their purchases through credit cards and EMIs.
Housing loan demand has also risen, initially driven by the government’s focus on affordable housing, and later by the desire for homeownership during the COVID-19 pandemic.
As for the increasing number of vehicles on the road, particularly larger ones, this can be partly attributed to the spike in vehicle loans, which have grown at a CAGR of 18.7% over the past decade.
What’s even more striking is the exponential rise in credit card usage. Not only has credit card penetration surged, but outstanding credit card debt has grown by an astonishing 26.3% CAGR over the last 10 years.
On the other hand, education loans have seen relatively modest growth, with a CAGR of just 6.8%.
The Rise of NBFCs
One consequence of the Twin Balance Sheet Crisis (characterised by high bank NPAs and corporate over-leveraging) was the rise of Non-Banking Financial Companies (NBFCs), also known as shadow banks.
NBFCs differ from traditional banks in that most typically can’t accept retail deposits. Instead, they borrow funds from banks and the bond market, then lend that money at higher interest rates to individuals and businesses that may face difficulties obtaining credit from banks.
Over the past decade, NBFC borrowing from banks has grown at a CAGR of approximately 18%, closely matching the rise in personal loans.
This growth also reflects the increasing role NBFCs play in filling the credit gap, particularly for sectors or borrowers underserved by traditional banks.
Summing it up!
The corporate loan segment, being low-margin and high-risk, has proven to be a tough lesson for banks, especially in the wake of the NPA crisis. In response, banks have shifted toward a “retail-first” approach to diversify their loan portfolios and reduce risk. Other factors that have driven this shift include the government’s push for affordable housing, the emergence of a west-influenced, consumption-based economy, the YOLO (You Only Live Once) mindset post-COVID, and the reluctance of corporates to borrow and invest in expansion.
While the corporate loan cycle ended poorly for both borrowers and banks, will the retail lending cycle face a similar outcome? I believe the situation is different this time, but I’d like to hear your thoughts as well.
Till the next time,
Vijay
CEO – InCred Money
P.S. I share my thoughts on Investing and the Economy regularly. You can follow me here.
