Credit Growth Not Fueled by Low Rates, According to BCG Study

Low Rates Do Not Push Credit Growth: BCG Report Challenges Conventional Wisdom

A recent report by the Boston Consulting Group (BCG) has sparked discussion across financial and policy circles, challenging the long-held belief that lower interest rates automatically stimulate credit growth.

According to BCG’s findings, there is no direct correlation between low interest rates and increased credit demand. Contrary to popular economic theory, simply slashing interest rates does not guarantee that consumers and businesses will borrow more.

Key Insights from the BCG Report

1. Borrower Behavior Is Complex
   BCG’s research highlights that credit growth is influenced by more than just interest rates. Factors like income certainty, economic outlook, debt levels, and regulatory frameworks often play a bigger role in borrowing decisions.
2. Banks Remain Cautious
   Even in low-rate environments, banks may tighten lending standards due to risk concerns, especially in uncertain or volatile markets. This limits access to credit despite the lower cost of borrowing.
3. Low Demand Despite Cheap Credit
   In some regions, particularly post-COVID economies, individuals and businesses are prioritizing deleveraging over expansion. BCG observed that even when central banks maintain near-zero interest rates, credit uptake doesn’t necessarily rise.
4. Structural Issues Over Monetary Policy
   The report suggests that structural reforms, financial literacy, and strong business environments have more influence on credit expansion than monetary policy alone.

What This Means for Policymakers and Banks

The BCG report serves as a wake-up call for policymakers relying heavily on rate cuts to drive economic growth. It suggests that more holistic strategies—such as boosting consumer confidence, reforming credit infrastructure, and supporting SMEs—may be more effective in encouraging healthy credit growth.

For banks, it reinforces the need to understand borrower sentiment and to balance lending incentives with risk assessment, especially in uncertain economic climates.

Mumbai: A new report by the Boston Consulting Group (BCG) warns that Indian banks must prepare for a period of heightened interest rate volatility after more than a decade of relatively stable and downward-trending rates. The study, Interest Rate Sensitivity in Indian Banking, highlights that the impact of policy rate changes on bank performance is neither immediate nor uniform, and that credit growth is more dependent on borrower sentiment and lender confidence than on rates alone.Empirical evidence underscores this point: credit growth remained weak during 2014–2016 and 2018–2020 despite declining or stable rates, while lending surged in 2022–2023 amid rising rates. The only clear instance where falling rates aligned with credit growth was during 2016–2018. BCG finds that unless credit demand is robust, rate cuts—unless sustained for 18–24 months—rarely drive significant lending increases.

The Reserve Bank of India (RBI) raised the repo rate by 250 basis points between 2022 and 2023 to tackle inflation, only to cut it by 100 basis points in early 2025 to boost growth. This policy reversal reflects mounting external risks—geopolitical tensions and structural imbalances in the global financial system—that now weigh more heavily on India’s interest rate path than domestic growth-inflation trade-offs.
BCG’s report urges banks to abandon linear forecasting and adopt scenario-based planning. It shows that repo rate changes take 12–24 months to influence key metrics such as credit, deposits, and Net Interest Income (NII), with public sector banks (PSBs) proving more responsive than private ones. A 50 basis point repo hike, for example, led to a 1.4% increase in advances for PSBs, compared to 1.16% overall.

Interestingly, deposit mobilisation showed little correlation with interest rates. PSBs, in particular, were largely unaffected, thanks to their stable depositor base. Even private banks responded weakly. Factors such as customer engagement, competition, and liquidity management mattered more than monetary policy.
By contrast, NII was highly rate-sensitive. A 50 basis point increase in the repo rate boosted NII by 1.11% across all scheduled commercial banks, and by 1.45% for PSBs. Rate cuts, predictably, led to income declines.

To navigate this shifting landscape, BCG recommends overhauling internal pricing frameworks, which still rely too heavily on historical cost of funds. This misaligns profitability and misallocates capital. A move toward marginal cost-based pricing and improved balance sheet simulations is essential. Meanwhile, changing saver preferences—toward mutual funds, pensions, and direct investments—mean banks must use data science to better understand and serve depositors, the report said.