Outlook 2025: Liquidity, Credit Growth - What Will Drive India's Banks This Year?

India's banking sector is poised for a critical year in 2025. Tight liquidity conditions, high loan-to-deposit ratios, and slowing GDP growth will demand cautious optimism. Yet, amid these challenges, opportunities abound in retail and infrastructure lending, driven by increasing demand and policy support.

According to HSBC's report on Indian Banks,, system-wide credit growth is estimated at 12.5% year-on-year(YoY) in FY25. However, this optimism is tempered by potential headwinds, including muted deposit growth and global economic uncertainties.

‘We continue to assume system loan growth of 12.5% y-o-y for FY25 in our base case. Multiple headwinds like tight liquidity conditions, muted growth in deposits, GDP slowdown and high loan-to-deposit ratio remain key risks to credit growth,’ the report reads.

Retail Lending as a Growth Driver
Retail loans remain a bright spot. November 2024 saw retail loans grow 13.3% y-o-y, led by unsecured personal loans, home loans (12.2% y-o-y), and gold loans, which surged 66.1% y-o-y. Credit card receivables also grew 18.1%, reflecting increasing consumer spending.

While vehicle loans dipped 1.8% month-on-month (m-o-m) due to softening auto sales, robust housing and gold loan growth provided a counterbalance.

Corporate and MSME Lending Outlook
Corporate credit, which expanded by 9.6% YoY in November 2024, is stabilizing. Lending to Non-Banking Financial Companies (NBFCs) rose by 2.5% MoM, reversing a trend of muted growth in earlier months.

“Higher risk weights and asset quality stress in certain segments of NBFCs could keep growth muted in the near term,” the report highlights.
Micro, Small, and Medium Enterprises (MSMEs) saw a healthy 13.8% YoY credit growth, driven by medium enterprises and transport operators. However, HSBC warns that any prolonged slowdown in GDP growth could adversely impact this segment.

Infrastructure Lending: A Mixed Bag
Infrastructure lending is another area to watch. Growth in this segment was subdued at 1.6% y-o-y in November 2024, primarily driven by sectors like roads and power. 

Risks and the Road Ahead
Key risks include a potential GDP slowdown and global market volatility. Despite these challenges, India's banking sector is well-positioned to leverage opportunities in retail and infrastructure lending.