Consumer Loan Growth in India Has Bottomed Out; Faster Recovery Likely as Credit Costs Ease: Morgan Stanley

RBI data and Morgan Stanley analysis suggest a turning point in India’s retail lending market.

Has India’s retail credit market reached the end of its slowdown? A new analysis from Morgan Stanley says yes. The firm believes consumer loan growth in India has bottomed out and will recover faster as credit costs fall. 

The Reserve Bank of India’s (RBI) Financial Stability Report, released on 30 June 2025, supports this assessment, showing historically low bad loan ratios and strong bank capital levels.

India Consumer Loan Growth Trends 2022–2025 Show Sharp Slowdown

Unsecured consumer credit in India saw a sharp slowdown between FY 2022–23 and FY 2024–25. According to Morgan Stanley, annual growth fell from about 31 per cent in the first quarter of FY 2022–23 to nearly 8 per cent in the fourth quarter of FY 2024–25.

However, the RBI’s sector-wise bank credit deployment data for June and July 2025 reveals that some segments are already picking up pace.
 

Housing and services credit are growing in double digits. NBFC lending has surged, helping offset the slowdown in unsecured personal loans.

RBI Policy Impact on India Retail Loan Growth

One factor behind this shift is the RBI’s policy decision on 16 November 2023 to raise risk weights on certain retail loans by 25 percentage points. This made riskier unsecured loans more capital-intensive for lenders, slowing growth in those categories but improving overall loan book quality.

This regulatory backdrop is shaping how banks and NBFCs allocate fresh credit. Lending is tilting towards secured products such as housing, vehicle loans, and priority sector lending, while discretionary personal credit takes a back seat.

Overall Bank Credit Growth in India Holds Steady

The Ministry of Finance’s Monthly Economic Review for March 2025 reported scheduled commercial banks’ total credit growth at around 11 per cent. This shows that while unsecured consumer loans have slowed, overall bank credit is holding steady, thanks to stronger demand in safer lending categories.
 

High capital adequacy and a low gross non-performing asset (GNPA) ratio give banks the flexibility to expand lending once consumer demand picks up.

Household Debt in India and Consumer Loan Demand

According to RBI data, household debt in India was 41.9 per cent of GDP as of December 2024. Most of this debt was in non-housing retail loans.
 

Although this level is higher than before the pandemic, it still leaves scope for more borrowing, especially if interest rates come down and banks loosen credit conditions.

FinTech Lending Growth in India Expands Credit Access

FinTech lenders have become important in India’s consumer credit market. In FY 2024–25, non-bank FinTechs gave out 10.9 crore personal loans worth ₹1,06,548 crore.
 

These digital lending platforms have extended credit access to smaller towns and rural areas. This wider reach could help speed up the recovery in consumer loans, as more people gain access to formal credit channels.

Non-banking financial companies recorded a 25.7 per cent rise in lending in June 2025. Their flexible lending models and partnerships with banks have allowed them to serve both secured and unsecured loan segments effectively.

Festive Season Could Boost Retail Loan Growth in India

The October–December quarter is traditionally the busiest time for retail loans in India. Consumer demand for vehicles, home appliances, and personal loans often rises during the festive season. If credit costs remain low and bank balance sheets stay strong, this period could mark the start of a steady revival in consumer lending.

Credit Cost Moderation Supports India Loan Growth Recovery

Morgan Stanley’s outlook is built on expectations of lower credit costs in the coming quarters. Credit costs are the funds banks set aside to cover possible loan losses. With bad loans at low levels and early signs of stability in repayments, banks can reduce these provisions.

Lower provisions mean more capital is available for fresh loans. This is especially important for expanding in loan categories with strong repayment patterns, such as housing and secured personal loans.

Economic and Policy Factors Influencing Consumer Loan Growth in India

Several factors are shaping the current state and future prospects of India’s consumer loan growth:

• Regulatory environment: Higher risk weights have shifted lending patterns towards safer loans.
   

• Sector rotation: Housing, NBFC lending, and services are offsetting the weakness in unsecured credit.
   

• Technology: Digital platforms are making credit more accessible across regions.

Why India’s Consumer Loan Growth Outlook is Important?

Consumer lending drives household spending, which supports economic growth. A recovery in consumer loans could boost sectors like retail, manufacturing, and services.

Healthy loan growth also reflects confidence among consumers and lenders. However, sustaining it requires careful risk management to prevent a rise in bad loans.

Conclusion

India’s consumer loan growth has slowed sharply since FY 2022–23, but current data suggests the downturn may have ended. Morgan Stanley and RBI figures from 2025 point to improving conditions for a recovery.

Strong bank capital levels, low GNPA ratios, and falling credit costs create room for lending to expand again. Segments like housing, NBFC loans, and services are already showing momentum. The upcoming festive quarter could provide the push needed for a full revival.

If banks keep lending discipline while meeting rising demand, India’s next phase of consumer credit growth could be both faster and more stable than before.
 

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