Getting credit flow where it matters most

In his August 6 bimonthly review of monetary policy, Reserve Bank of India Governor Sanjay Malhotra underlined the steady flow of resources to the commercial sector despite a recent slowing in bank credit growth. He pointed out that higher flows from non-bank sources, both domestic and external, more than compensated for reduced flows from banks. As a result, total resources to the commercial sector rose by ₹900 billion to about ₹35 trillion in the year ended March 2025, a trend that appears to have extended into the current year.

Malhotra also emphasised that bank credit growth of 12.1% in 2024-25 exceeded the decadal average of 10.3%. The shift to single-digit credit growth in the early months of 2025-26, he suggested, is not alarming since overall financing for the commercial sector remains intact. That holistic view is valid in aggregate terms, yet the real issue lies beneath the headline numbers. The pattern of credit allocation is shifting in ways that merit closer scrutiny.

Credit Shifts
Between 2014 and 2024, total resources to the commercial sector rose 2.5 times while nominal GDP expanded 2.7 times. As a ratio to GDP, flows stood at 11.7% in 2023-24 but slipped below 11% in 2024-25. 

The decline does not look dramatic against the backdrop of past swings, which ranged from a pandemic low of 7.7% in 2019-20 to a peak of 12.5% in 2017-18. What is concerning is that 2024-25 marked the first drop in the ratio since the pandemic, even though banks and non-bank financial companies were enjoying strong balance sheets and defaults were at a decade low.

Banks have been the main drivers of this variation. Their share in total resources swung from 28% in the Covid-hit year of 2020-21 to 63% in 2023-24, excluding the HDFC merger effect. That share fell back to 53% in 2024-25 and is trending lower in the current year. Trade uncertainty, geopolitical risks and deferred investment decisions are dampening loan demand, while improved fiscal conditions and expectations of monetary easing triggered a rally in corporate bonds, offering companies attractive alternatives to bank finance.

NBFCs, by contrast, have shown resilience. Adjusting for bank loans to them, their direct lending has grown steadily since the pandemic. Even after higher risk weights reduced bank lending to NBFCs from November 2023, a sample of 36 firms, including 14 housing finance companies that represent 90% of NBFC assets, recorded sequential loan growth of 3.3% in the June 2025 quarter and an annual rise of 15.2%. Within the group, infrastructure NBFCs have shown improved momentum, housing financiers have expanded solidly though slightly below the average, and consumer-focused NBFCs have moderated. Sector specialists such as those in vehicle finance, gold loans and microfinance displayed mixed growth outcomes.

Yet NBFCs and housing financiers together still account for less than one-fifth of total flows to the commercial sector. Expecting them alone to sustain overall momentum would be both inadequate and imprudent.

Investment Demand
A reduction in policy rates could revive short-term demand for credit, particularly household consumption loans. But a meaningful recovery in bank credit depends on reviving private investment appetite. Capacity utilisation in manufacturing has stayed above 75% for several quarters, yet new investment has not followed. Foreign direct investment flows have also weakened, falling from one quarter of total flows in 2019-20 to just one fourteenth in 2024-25.

The structural answer lies in lifting business confidence. The government has carried the bulk of the burden through capital expenditure since the pandemic. The private sector has preferred deleveraging to committing funds alongside the state. With the added challenge of United States tariffs, this is the time to accelerate reforms that reduce logistics costs, ease regulatory frictions and create incentives for investment in emerging sectors.

India has enough financial depth to support growth. What it needs is a stronger pipeline of viable projects that draw in both bank and market funding. Credit flows are holding up, but to get money where it matters most, policy must encourage private investment to step forward.