SBI Chairman CS Setty Outlines Impact of Potential Rate Hikes on Consumption Credit and Retail Asset Quality

A shift in the monetary policy cycle toward interest rate hikes could impact credit demand from discretionary and consumption segments, according to State Bank of India (SBI) Chairman CS Setty. However, he noted that this shift is unlikely to dent retail asset quality at the system level.

Speaking at the annual Business Standard BFSI Insight Summit, Setty—who also heads the banking industry grouping IBA—stated that SBI expects another 0.50 per cent rate hike during the Reserve Bank of India's (RBI) December policy review, followed by a pause at the February 2027 policy meeting. Earlier this month, the RBI raised rates by 0.25 per cent, marking its first tightening move in over three years due to inflation risks, and shifted its policy stance to calibrated tightening.

"If a couple of rate hikes are going to be there, the discretionary consumption demand and the consumption credit will be impacted," Setty said. At the same time, pointing to the robust 7.1 per cent growth expected for the fiscal year, he added that demand from productive sectors is unlikely to face negative impacts.

When questioned about potential risks to asset quality given that many loans are tied to external benchmark-linked rates and get repriced immediately following RBI hikes, Setty expressed confidence. "Broadly from a system-level perspective, I don't think we should be really worried about the asset quality on the retail front," he stated, while acknowledging that some leveraged borrowers might find it challenging to face a cumulative 0.75 per cent rise in interest rates.

On digital payments, Setty welcomed the proposal to introduce a merchant discount rate (MDR) on UPI transactions. He stated that the move will support banks in investing in necessary infrastructure and risk engines. He added that the IBA is collaborating with stakeholders to ensure customers are not burdened with higher rates charged by merchants due to UPI MDR.

SBI is also developing a new version of its Yono mobile application, named 'Yono Bharat', aimed at over 17 crore Jan Dhan account holders out of its total 53 crore depositor base. Slated for release within a year, the application is expected to help expand the Yono platform's user base from 11 crore currently to 30 crore by 2030. Setty emphasized the cost efficiency of digital banking, noting that a digital transaction costs approximately Re 1, compared to over ₹40 for a physical branch visit.

Addressing the broader industry conversation surrounding artificial intelligence and its impact on employment, Setty remarked that deploying new-age platforms involves significant costs. "AI deployment would be evaluated on the productivity gain. It's not merely replacing a human. And many of the Western companies which have aggressively gone into AI realised that probably it makes sense to put a man there instead of an (AI) agent," he said.

Additionally, Setty noted that banks are unlikely to engage in exuberant lending using the over USD 133 billion in diaspora deposits raised through a recently closed concessional swap scheme. He stated that these funds will instead be deployed over the course of up to three quarters.

"CS Setty's observations highlight a realistic balance between macroeconomic monetary tightening and institutional readiness in India's banking sector. While upcoming rate hikes may temporarily cool discretionary consumer credit demand, the systemic resilience of retail asset quality remains a reassuring sign for the broader economy. Furthermore, SBI's strategic focus on scaling digital infrastructure like Yono Bharat and cost-efficient digital transactions underlines how large financial institutions are successfully adapting their operational models to drive long-term profitability and inclusion." — Dr. Shishir Gupta, Founder & CEO, StartupLanes