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Softening growth in the formal sector is beginning to weigh on overall credit growth, according to a report by HSBC Global Research.
The report noted that, after a few years of strong growth, the formal sector is expected to slow in 2025. "This is led by factors such as gains from strong equity markets and rising wage growth now plateauing after a strong run," the report added. India's bank credit growth, which was 16 per cent a year ago, has now declined to 9 per cent as of June 2025. A deceleration in credit growth reflects a sharp fall reflects reduced borrowing and weaker demand in the economy. The report titled 'India: Credit, deposit and market memory' stated that just like the earlier issue with deposits was linked to changes in the real economy, the current slowdown in credit growth is also rooted there. The weaker GDP growth of the economy has reduced the overall need for borrowing. More importantly, there has been a shift in growth from the formal sector to the informal sector. Since the formal sector is not doing as well in the current year, there is less demand for loans to fund investments like buying homes. The report further added that at the same time, people in the informal sector are seeing better incomes--both in farming and other jobs--so they do not need to take as many personal loans to support their spending. As a result, credit growth is being squeezed from both sides. "With formal sector fortunes not rising as rapidly this year, the investment demand for credit (e.g. housing loans) will likely be tepid. With the informal sector benefiting from better real incomes (both farm and non-farm), the need to take personal loans to fund consumption will likely be weak too," the report added. Talking about the possible solutions, the report added that at a time when global supply chains are getting rejigged, if India can do the right reforms, it could become a meaningful producer and exporter of goods, which could spur investment, credit and GDP growth. "The reforms include lowering tariff rates, signing trade deals, welcoming FDI inflows, and improving ease of doing business. A start has been made. But for impact, reforms need to run deep," the HSBC report added. (ANI)
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