People don’t want to borrow loans even after the RBI cut repo rates

Most private and public banks, despite holding record cash reserves, witnessed a sharp slowdown in loan disbursals during the April–June quarter. Credit numbers released by the Reserve Bank of India (RBI) as of June 13, 2025, point to a visible drop in the appetite for lending across the banking system.

On 6 June 2025, the RBI’s Monetary Policy Committee reduced the repo rate by 50 basis points and brought down the cash reserve ratio (CRR) by 100 basis points.

The RBI had also indicated a clear shift in policy stance towards supporting credit expansion. However, the lending data for the June quarter tells a different story.

Loan Demand Slows Despite Policy Easing

RBI’s latest scheduled commercial bank data shows credit growth at 9.6 percent year-on-year for the fortnight ending June 13, 2025. In comparison, the year-on-year loan growth stood above 11 per cent in March.

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Quarter-on-quarter, the loan growth dropped to around 0.4 percent, far below the expected 1.5 to 2 percent expansion usually seen in the first quarter of a financial year.

System-wide Loan Movement – April to June 2025

Period	Loan Growth (QoQ)	Loan Growth (YoY)
Q1 FY25 (Mar–Jun 2024)	1.90%	11.40%
Q1 FY26 (Mar–Jun 2025)	0.40%	9.60%

The slowdown is attributed to a mix of seasonal behaviour, caution by lenders, and lack of fresh credit demand, especially from large industrial borrowers. Smaller business segments like MSMEs and agriculture still showed activity, but those were not large enough to lift overall numbers.

Public Banks Pull Ahead, Private Lenders Trail

Interestingly, public-sector banks have shown more resilience. According to a report by the Economic Times published on June 27, 2025, banks like Punjab National Bank and UCO Bank have grown their loan books faster than their private counterparts.

UCO Bank posted a 16.6 per cent year-on-year loan growth, while its deposits increased 11.5 per cent during the same period.

Bank-wise Performance Snapshot (April–June 2025)

Bank Name	Loan Growth (QoQ)	Deposit Growth (QoQ)
HDFC Bank	0.40%	1.80%
Punjab National Bank	1.30%	1.40%
UCO Bank	2.30%	1.70%
Bank of Baroda	–1.9%	–2.5%
Yes Bank	–2%	–3%

While a few banks expanded their loan book, others, like Bank of Baroda and Yes Bank, actually saw a fall in both credit and deposits. Analysts believe this could be linked to tight internal capital controls and hesitancy in pushing credit without stronger borrower backing.

Segment-Wise Activity Paints a Mixed Picture

According to the same RBI data, MSME lending remained steady. Loans to micro and small businesses grew in the mid-teens on a year-on-year basis.

However, corporate credit demand stayed nearly flat, with just about a 1 per cent increase. Retail segments like personal loans, auto finance, and housing saw average growth rates between 6 and 9 per cent.

Sector-wise Loan Growth (as of June 13, 2025)

Segment	YoY Growth (%)
MSMEs	15% (approx.)
Large Corporates	1% (est.)
Vehicle Loans	6.00%
Housing & Personal	9%

The data shows banks are still lending carefully, mostly giving loans in safer categories. Unsecured loans have dropped because earlier RBI reports showed more people missing repayments.

The next question is: Why is loan demand not picking up, even after liquidity has been released?

Policy Push Not Reaching The Ground Yet

On June 6, 2025, the RBI delivered what the market called a “liquidity bazooka,” cutting both the repo rate and the CRR simultaneously. The repo rate now stands at 5.5 per cent.

The idea was to make funds cheaper and more available. But cheap liquidity alone doesn’t lead to more borrowing. Confidence, demand visibility, and sectoral policy clarity also matter.

Also Read - SBI Expects Loan Growth to Slow Down to 12–13% in FY26

Meanwhile, banks are holding back not because of a lack of funds but because of a lack of confidence in repayment. This cautious mood is also reflected in their preference for deposit growth over credit expansion.

HDFC Bank – Loans vs Deposits Trend

Period	Loan Growth (YoY)	Deposit Growth (YoY)
Q1 FY25	10.30%	14.10%
Q1 FY26	6.70%	16.20%

The bank added more deposits but lent out less than half that amount. This balance sheet conservatism could become a bigger issue if the trend continues into the festive season, when lending typically rises.

What Could Change Ahead?

There are early signs of recovery in a few areas.

The RBI’s latest Financial Stability Report, released on June 30, stated that gross NPAs for Indian banks were expected to stay low at around 2.5 per cent by March 2026.

This means that the credit risk environment remains healthy. It gives banks a bit more comfort in lending if other conditions improve.

Also, increased government spending in rural schemes and the monsoon-linked boost to consumption could gradually raise demand for credit in the second half of FY26.

Banks will now wait to see how these macro signals play out before loosening their hold.

In the end, the liquidity exists. But as of now, it is sitting idle.

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