Credit and profitability of banks to moderate in FY25, says ICRA

• The Indian banking sector’s credit growth and profitability could moderate in FY25, says ICRA.
• It expects FY25’s credit growth at 11.7-12.5% slowing down from FY24’s 16.3% growth.
• The credit deposit ratio is estimated to have increased to 78% as of March 2024 – to a six-year high.
  

The Indian banking sector’s rating has been revised to stable from positive by rating agency ICRA on Wednesday. It expects credit growth and profitability metrics to moderate in FY25, even as it expects them to remain healthy.

A stable outlook indicates a low likelihood of rating change in the near to medium term. The agency expects credit growth to be anywhere between 11.7-12.5% in FY25. It was at around 16.3% in FY24.

“The challenges in deposit mobilisation, and regulatory measures to slow down credit growth towards loans extended to consumer credit and non-banking finance companies (NBFCs) are expected to temper expansion modestly to ₹19.0-20.5 trillion in FY25. This would be next only to the highest ever credit expansion of over ₹22.2 trillion in FY24,” said Sachin Sachdeva, VP and sector head at ICRA.

Interest margins have been compressing for banks in the last 18 months, driven by rising deposit costs. Moreso, expectations of a rate cut in the second half of FY25 could lead to margin pressure, driven by a likely downward repricing of advances, the agency says.

The ‘Great Deposit’ challenge

Robust growth in credit and a slowdown in deposits have impacted the credit deposit ratio (CD ratio) of banks. The CD ratio for the banks is estimated to have increased to 78%, excluding the merger of HDFC as of March 22, 2024, which amounts to a six-year high.

It’s high even compared to 2023, which was at 75.7%. “This will pose significant challenges for the banks to pursue credit growth as their on-balance sheet liquidity has been deployed towards strong credit growth during the last two years,” says ICRA.

It also estimates the CD ratio is likely to remain elevated at over 80% (including the HDFC merger) in FY25. A few private banks may see a decline in this metric, while some of the public banks may see an increase in their CD ratio.

Many analysts expect banks to engage in a war for deposits. In spite of the challenging environment, it’s quite unlikely that they would raise deposit rates.

“Deposit rates may have peaked. Some rates may have been frozen and are unlikely to rise significantly. Some banks may go for a tactical shift and increase them. The short-term deposits are likely to see a rise in rates,” said Karthik Srinivasan, senior VP & group head of financial sector ratings at ICRA.

Currently, the average deposit rates are at around 7% for a one-year period.