HDFC merger continues to remain a drag on bank credit growth
As the banking landscape evolves post-merger, the focus remains on balancing growth while ensuring stability within the financial system. The coming months will be crucial in determining how HDFC Bank navigates these challenges and capitalises on emerging opportunities in the market.
ANI The home loan portfolio, traditionally HDFC's core strength, has been particularly affected. The recent merger between HDFC and HDFC Bank has significantly impacted credit growth in the Indian banking sector. In the financial year 2024 (FY24), this merger led to a marked slowdown in bank credit growth, which continued into FY25 and pulled overall industry credit growth down to single digits in the first quarter of FY26. As per data from the Reserve Bank of India (RBI), bank credit growth was recorded at 9.5% at the close of Q1, while deposits showed a healthier growth of 10.1%. In contrast, HDFC Bank's outstanding loans rose by only 6.7%, and its deposits increased by 16.2%.As the banking landscape evolves post-merger, the focus remains on balancing growth while ensuring stability within the financial system. The coming months will be crucial in determining how HDFC Bank navigates these challenges and capitalises on emerging opportunities in the market.This decline in loan growth, which fell from a robust 15-17% before the merger to just 5.4% in FY25, has become a concern for the broader banking system.The merger aimed at restoring balance sheet stability resulted in a spike in the credit-deposit (CD) ratio, which reached 110% post-merger. To counter this, HDFC Bank adopted a strategy to bring the CD ratio down to approximately 95%.
HDFC Bank Managing Director and CEO Sashidhar Jagdishan noted that the bank intentionally slowed down its average advances growth to around 7% last year to meet these strategic objectives. However, growth in Assets Under Management (AUM) has reportedly improved to 8% in the June 2025 quarter.Particularly affected has been the home loan portfolio, traditionally HDFC's core strength. This segment has seen a year-on-year growth of just 7%, lagging behind the industry average of 9%. Jagdishan acknowledged that the mortgage market is facing intense competition, especially from public sector banks offering lower interest rates between 7.1% and 7.3%.Rather than engage in a pricing war, HDFC Bank has opted to price its loans 50-80 basis points higher, focusing on superior service and fostering wider customer relationships.Looking ahead, HDFC Bank anticipates a recovery in consumption in both urban and rural markets, aided by the approaching festival season. Factors such as improved sentiment, lower interest rates, and fiscal incentives are expected to drive growth.Additionally, the bank has noted a positive momentum in the Micro, Small, and Medium Enterprises (MSME) sector, buoyed by early exports aiming to benefit from potential tariff changes.On the staffing front, HDFC Bank has hired around 4,000 employees in the latest quarter to bolster its branch operations. Jagdishan highlighted the bank's objective of increasing customer-facing and revenue-generating roles as part of its long-term strategy.
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