Banks in India have seen strong credit growth in recent years, particularly driven by growing demand in the retail segment. Unsecured loans and credit to non-banking finance companies have grown at a fast clip. But, the growth is expected to slow this year amid regulatory tightening and deposit mobilisation continuing to lag credit growth.
Credit ratings agency ICRA sees credit growth in the range of 11.7-12.5 per cent in the current financial year ending March 2025, compared with 16.3 per cent growth in 2023-24. In this backdrop, ICRA has revised its outlook on the banking sector to stable from positive.
Over the last 12-18 months, banks saw huge demand in retail credit, especially in the unsecured space. This led the Reserve Bank of India to raise risk weights on consumer loans, credit card exposures and loans to NBFCs in November 2023.
Furthermore, the credit to deposit ratio is estimated to have risen to 78 per cent as on March 22, 2024, significantly higher than the 75.7 per cent as on March 24, 2023 and 71.9 per cent as on March 25, 2022. The credit to deposit ratio is also highest since December 2018, when it was at 77.9 per cent. This will also pose significant challenges for banks to pursue credit growth.
"The challenges in deposit mobilisation, and regulatory measures to slow down credit growth towards loans extended to consumer credit and NBFCs are expected to temper expansion modestly to Rs 19.0-20.5 lakh crore in FY2025 (year-on-year growth at 11.7-12.5 per cent)," said Sachin Sachdeva, vice-president and sector head at ICRA.
Still, this would be next only to the highest ever credit expansion of over Rs 22.2 lakh crore (16.3 per cent growth) in the previous financial year.
With the credit to deposit ratio expected to remain elevated this year, competitive intensity between banks to raise deposits will also be high. This will limit the ability of banks to cut their deposit and lending rates, pointed Sachdeva.
High cost of term deposits has impacted net interest margin of banks and they are expected to further moderate this year.
Central banks raised their interest rates sharply to curb post pandemic inflation over 2021-22. The cycle, however, is expected to reverse this year. The Reserve Bank left the repo rate unchanged at 6.50 per cent for the seventh consecutive time last week. Several economists have opined that the central bank could cut rates beginning the October-December quarter this year.
"If policy rates are cut, it will pose significant challenges to banks' net interest margins," said Sachdeva.
Meanwhile, banks' asset quality is expected to remain on an improving trajectory, believes ICRA.
The ratings agency expects both gross as well as net additions to non-performing loans to increase this year; slower recoveries, and low hanging resolutions and recoveries largely complete being among the key reasons.
Public sector banks are seen in a better position. While, gross fresh NPA generation for public banks is seen going up to 1.5 per cent in 2024-25 from 1.3 per cent in 2023-24, in the case of private banks its seen going up to 2.2 per cent from 2.0 per cent. But, the continued expansion in loan book will lead to headline asset quality metrics of banks improving.
ICRA projects banks' gross NPAs to decline to 2.1-.2.3 per cent by March 2025, compared with an estimated 3 per cent for March 31, 2024. Net NPAs are also seen coming down a bit to 0.5-0.6 per cent, from 0.7 per cent in the same period.
Net NPAs of state-owned lenders are seen at 0.6 per cent by March 2025, which will be lowest since June 2009. Private banks' net NPAs are expected to be at 0.5 per cent by then, which will be lowest in over 15 years.
