HSBC Flags Cooling Credit Fever As The Formal Sector Hits Snooze On Borrowing (Pic:X)
Softening growth in India’s formal sector is beginning to weigh on overall credit growth, according to a new report by HSBC Global Research. After enjoying a few years of strong expansion, the formal sector is expected to lose steam 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 noted. India’s bank credit growth, which stood at 16 percent a year ago, has now declined sharply to 9 percent as of June 2025.
The slowdown in credit growth reflects a significant fall in borrowing activity, pointing to weaker demand in the overall economy. The report, titled India: Credit, Deposit and Market Memory, drew parallels with earlier deposit-related slowdowns, noting both are deeply linked to changes in the real economy.
Weaker GDP growth has reduced the overall demand for loans, and the shift in momentum from the formal to the informal sector has further altered the borrowing landscape. With the formal sector underperforming in 2025, demand for investment-related loans—such as home loans—has slowed noticeably.
At the same time, people working in the informal sector are witnessing better incomes across farming and non-farming jobs, reducing their reliance on personal loans to fund spending. As the report notes, “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.”
Looking forward, the report suggests that India could regain its credit momentum by implementing key structural reforms. As global supply chains shift, India has the opportunity to position itself as a competitive producer and exporter. This transition, however, requires sustained policy action.
“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
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