Rating agency ICRA on Wednesday revised its outlook for Indian banks to "stable" from "positive" for Financial Year 2024-25 (FY25), saying it expects credit growth and profitability to moderate. The sector’s overall profile is expected to remain healthy.
Sachin Sachdeva, vice-president and sector head at ICRA, said challenges in deposit mobilisation and regulatory measures could slow down growth in consumer credit. Non-banking financial companies (NBFCs) are expected to temper expansion to Rs 19.0-20.5 trillion in FY25 from Rs 22 trillion in FY24.
Credit expansion in absolute terms was the highest ever in FY24. The growth in per cent terms year-on-year is expected to moderate to 11.7-12.5 per cent in FY25 from 16.3 per cent in FY24, said ICRA.
While the compression in the banking sector’s interest margins over the last 18 months has been driven by rising deposit costs, the expectation of a rate cut in the second half of FY25 could lead to margin pressure that is driven by a likely downward re-pricing of advances.
A growth in loan book, despite margin compression, is expected to translate into steady operating profits that will be aided by benign credit costs. Loan book growth is expected to drive healthy earnings that will largely be sufficient for most banks to meet their regulatory and growth capital requirements, ICRA said.
The credit to deposit ratio (C/D ratio) for banks is estimated to have increased to 78 per cent, excluding the merger of HDFC with HDFC Bank as of March 22, 2024. This ratio is the highest since December 21, 2018 (77.9 per cent), and much higher compared to 75.7 per cent as on March 24 last year and 71.9 per cent as on March 25, 2022.
The C/D ratio may pose challenges for banks as they have deployed their on-balance sheet liquidity for strong credit growth in the last two years. The sector’s C/D ratio is likely to remain high at over 80 per cent (including the HDFC merger) in FY25. The ratio may decline for some private banks and increase for certain state-owned lenders.
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"With an elevated C/D ratio, the competition for deposit mobilisation is likely to remain high even during FY2025, which will limit the banks' ability to cut their deposit and lending rates. Amid this, if the policy rates are cut, it will pose significant challenges to banks' net interest margins," said ICRA.
