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Indian Loan Market: July 2025 Update

Submitted by admin on July 10th, 2025

Indian lending environment of July 2025 is a complex one, an environment of modest growth, a changing borrower preference, an altering sectorial dynamics, and a large measure of regulatory interventions. Credit growth has slowed since the high rates recorded after the pandemic, but support remains high on the basis of fundamentals. Considerable momentum has been evinced in the sector this month, with the engine recording a healthy pace mostly due to personal loans and MSME financing, albeit with less restricted energy being added by corporate and infrastructure lending.

This month, the highlights to Indian loan market which we shall look at are as follows.

Loan Growth: Stable yet Simmering

The overall credit growth of India in July 2025 has remained composed and steady but at a slow pace. The total bank credit has been growing at a pace of approximately 9.6% on a year-on-year basis signifying stable credit condition, but this is a moderate percent as compared to the previous fiscal year.

Serial-wise, growth is stagnant and in June there was only slight increase in the lending in comparison to May. This is an indicator of a tempered growth in segments as banks and borrowers acclimatise to pandemic-beyond-conditions, intensive interest rates and stricter credit standards expectations.

Irrespective of this, bank balance sheets are sound. The total ratio of non-performing assets (NPA) of the commercial banks is around 2.3 percent, which is around historic lows and the risks of worsening are also low in the short-run quarters.

Retail/MSMEs Marching On Multifactorial Lending MIX

Credits in the corporate sector remain retarded but the other sectors which are getting the books of loans stirring up is the retail and MSME (Micro, Small, and Medium Enterprises) sector.

Personal loans boom Personal loans Personal loans boom Personal loans will become a focus of consumer lending in the next year.

Consumers are still depending on unsecured credit. The Personal loans, credit cards and consumer durables finance have experienced steady month on month growth. The indebtedness has grown and now the average amount of debt per person borrower has grown by a large margin during the past two years. Remarkably, there is increased non-housing retail lending which currently comprises more than half of household liabilities.

That said, there are signs of stress in certain consumer segments—particularly credit card outstandings—which are showing an uptick in delinquencies. The credit quality of unsecured lending is under watch, even though broader risk metrics remain under control.

MSMEs Remain Imperturbable

Giving small business loans remains a shining light. Most MSMEs are taking advantage of flexible policy standards, online lending practices, and reviving domestic demand conditions. The government continues to pay particular attention to this segment and supports it through refinance programs, subsidizing the interest rate, and online onboarding, thus ensuring the influx of credit.

Housing Loans: Period of Cooling-Down

The home loan market that has been on a roll since after 2020 is showing signs of a slowdown. Disbursals have weakened and there is only parcel of growth in originations. The prices of real estate properties combined with the increase in EMI in previous quarters as well as the oversense buyer sentiment has resulted in the flattening of the demand.

Yet, the expenses are relatively affordable across most of metro cities and Tier-II cities. The recent reduction in interest rates has also started giving some relief in the EMI burden and a turnaround is quite possible towards the later part of the year, particularly in the lower end of the housing segment.

Lending Infrastructure: Waiting to be Pushed

The lending to infrastructure has shrunk modestly in the last one year. There has been slowdown in project approvals and banks are being guarded about legacy issues of asset quality and long gestation periods.

Regulators have announced amendments to the infrastructure loan provisioning norms as belt tightening measures. Banks will enjoy reduced provisioning requirements on infrastructure loans in the new infrastructure later in the year, its percentage will drop to 1% as opposed to the 5% previously. It should provide an incentive to the lenders and this should tentatively rekindle long-term project financing interest.

NBFCs are Growing at a Fast Rate–A note of warning

The Non-Banking Financial Companies (NBFCs) in India are in the streak of growth, as the outstanding advances have increased more than twice the amount as in the previous four years. These institutions have helped in closing credit gaps in underserviced sectors such as rural, education loans and micro-credit.

Their agility, tech-first approach, and focus on niche markets have fueled this surge. However, regulators and market watchers are urging caution. There’s increasing concern about potential overheating in unsecured lending, prompting calls for responsible growth and interest rate moderation.

It is a fact that the Public Sector Banks perform better compared to the Private players.

Close on the heels of this, a dramatic twist has been that this year, public sector banks (PSBs) have led with loan growth as compared to the growth registered by the interests of the private banks- something that has never happened in the past decade. Government-related infrastructure projects, financing small and medium enterprises (MSMEs) and wide retail penetration have driven credit growth of over 10 percent by PSBs.

It is a turning point, as better operating efficiency and risk management have been registered among state-owned lenders. On its side, private banks are being more careful especially in the portfolio of unsecured lending.

Banking Margins in Trouble

Due to the bimonthly decrease in the policy rates effected by the Reserve Bank since last couple of quarters, rates on advances have been cut across the board. This is good to the borrowers but it strains Net Interest Margins (NIMs) of the banks.

A large number of lenders also are experiencing faster deposit growth relative to loan growth, further crushing the margins. Now the banks are concerned with maximizing their asset-liability portfolio and increasing efficiency in the deployment of capital.

Policy changes: Regulatory momentum builds Regulatory changes are gathering pace and picking up momentum.

Some of the policy/regulatory interventions to enhance transparency, increase competition and promote financial inclusion have occurred in July.

Floating Loans No More Penalties in Prepayment

In a dramatic step, the regulators have prohibited lenders against charging prepayment duties on floating-rate loans to individual borrowers and small businesses. This is a rule due to go into effect in January 2026 and to have the effect of increasing borrower flexibility, lowering costs, and in turn raising lender competition.

Increment in Education Loans

In this initiative to enhance access of higher education, government has directed the banks in the public sector to process the outstanding applications of education loan within 15 days and enhance the processing timeframe. This is after complaints that a high number of students eligible to receive funding are unable to get such funding because of the delays involved.

Digital Lending Oversight Tightened

The digital lending ecosystem is undergoing a major clean-up. Fresh guidelines issued this year make it mandatory for all digital lenders and loan service providers to report loans to a centralized credit system. They must also offer full transparency on interest rates, charges, and partner institutions.

This step aims to protect borrowers from predatory practices, hidden fees, and fraudulent fintech operations.

Liquidity Measures and Credit Transmission

With inflation under control, the central bank has pursued a pro-growth monetary policy. The repo rate has been cut by a full percentage point over the last six months, and systemic liquidity is now in surplus. However, credit transmission remains uneven.

To align market interest rates with policy objectives, the central bank has conducted multiple reverse repo operations in July to absorb excess liquidity. Analysts believe liquidity management will remain crucial in supporting lending activity while maintaining financial stability.

What Lies Ahead?

Positive Momentum in Retail and MSME Lending

The second half of 2025 is expected to see retail and MSME lending continue as the primary drivers of credit growth. Demand from urban salaried individuals, gig workers, and small businesses remains intact.

Digital platforms and co-lending partnerships between banks and NBFCs will further amplify access and efficiency.

Gradual Revival in Infrastructure and Housing

With regulatory support and lower interest rates, the infrastructure and housing sectors are poised for a comeback. The impact of relaxed provisioning norms for project loans will be closely monitored in the coming quarters.

Risks to Watch

• Credit stress in unsecured segments, especially credit cards and personal loans
• Margin compression for banks as deposit costs rise faster than lending rates
• Global economic uncertainty, which could affect corporate credit cycles
• Household over-leverage, which may limit future demand

Conclusion

India’s loan market in July 2025 presents a picture of cautious optimism. While overall loan growth is moderating, the ecosystem remains healthy and dynamic. Retail loans, small business finance, and digital lending platforms are providing new momentum, even as traditional segments like infrastructure and corporate credit undergo recalibration.

Policy makers are playing an active role in fostering transparency, inclusion, and competition. With the right balance of caution and innovation, India’s credit economy appears poised for a sustainable growth path through the rest of 2025 and beyond.