India Ratings pegs bank credit growth at 15.4% for FY25

India Ratings has forecasted banks loan growth at 15.4% in FY25. The rating agency has also estimated that a turnaround in private capital expenditure could offset any pressure on the overall credit growth in FY25.

“The RBI’s November 2023 advisory on risk weight assets has had a slowing effect on yoy growth in the unsecured retail segment and credit extended to non-banking financial companies in the past few months,” the rating agency said in a note. “A revival in private capex could further offset any pressure on the overall credit growth in FY25, even as growth in the agriculture segment is likely to remain largely stable with the weakening of El Nino conditions, leading to a normal monsoon.”

As of 31 May 2024, the banking system’s credit growth (excluding HDFC Ltd’s merger with HDFC Bank) was 16.1% on year. Including the HDFC merger impact, the banking system credit grew 19.8% as of 31 May 2024.

Credit growth for the industry segment had peaked in October 2022 at 16.4% yoy, and dipped to 5.2% yoy in July 2023, which has now recovered to 6.9% in April 2024.

The recovery was largely supported by the large industry segment (around 71% of industry) which grew 4% in April 2024. Also, the micro and medium segments are still showing encouraging growth trends at 15.6% yoy and 13.3% yoy, respectively, in April 2024.

Public sector banks have also already provided higher sanctions to the industry segment. and the rating agency expects this to materialise in the first half of the current fiscal, largely driven by the Production-linked Incentive based manufacturing, renewables and infrastructure sectors.

“Banking system liquidity to remain volatile in the near term. Reversal in the interest rate cycle could put pressure on the margins for banks. Credit cost trends also reflect bottoming out in FY24”, says Karan Gupta, Head and Director Financial Institutions, India Ratings.

Meanwhile, deposit growth in the Indian banking system continued to lag the system credit growth at 15.3%. It still improved to 12.2% yoy for 31 May 2024. However, the mix of deposits has changed with the increase in policy rates and banks increasing term deposit rates.

The upward repricing of term deposits has also widened the interest rate gap between term deposits and CASA, thus making the value of CASA franchise even more significant. With the current interest rate cycle likely to reverse in the second half of FY25 and depending upon its progress, some funds could return to CASA balances, India Ratings said.