Icra Forecasts Increase In Fresh NPAs For Private & Public Banks In FY25

Investment Information and Credit Rating Agency (Icra) has forecasted a resurgence in the creation of fresh non-performing assets (NPAs) for both private and public sector banks in the fiscal year 2025, marking a reversal from the downward trend observed over the past two years. The rating agency's announcement coincided with its revision of the Indian banking sector's outlook to "stable" from "positive" for the same period, citing expectations of a slowdown in credit expansion and profitability metrics.

According to Icra's analysis, the anticipated fresh NPA generation rate for public sector banks (PSBs) is poised to elevate to 1.5 per cent in FY25, a marginal increase from the estimated 1.3 per cent recorded in the previous fiscal year. Similarly, for private banks, the forecast indicates a rise to 2.2 per cent in FY25 from 2 per cent in FY24.

Sachin Sachdeva, Vice President and Sector Head of Financial Sector Ratings at Icra, emphasised that the deceleration in credit growth is likely to contribute to an uptick in slippages. Nonetheless, he noted that the overall slippage rate is expected to remain relatively subdued. Consequently, headline asset quality metrics are projected to exhibit improvements throughout FY25.

Despite the projected rise in fresh NPAs, Icra anticipates a decline in the gross NPAs of PSBs to approximately 2.3 per cent by March 2025, marking the lowest level since June 2012. Similarly, gross NPAs for private banks are forecasted to decrease to around 2.1 per cent by the same period, the lowest in over 15 years.

The compression witnessed in the banking sector's interest margins over the past 18 months has primarily been attributed to escalating deposit costs. Icra suggests that the expectation of a rate cut in the second half of FY25 could further exacerbate margin pressure, driven by the probable downward re-pricing of advances. However, it anticipates that growth in the loan book, despite margin compression, will translate into steady operating profits, buoyed by favorable credit costs.

Moreover, Icra highlights that the credit-to-deposit ratio (C/D ratio) for banks has surged to 78 per cent, excluding the merger of HDFC with HDFC Bank, as of 22 March 2024. This ratio, representing the highest level since December 2018, is expected to remain elevated at over 80 per cent (including the HDFC merger) in FY25. Such a high C/D ratio could pose challenges for deposit mobilization and limit banks' flexibility to adjust deposit and lending rates.

In light of these developments, ICRA emphasises that if policy rates are slashed amid heightened competition for deposit mobilisation, it could pose significant challenges to banks' net interest margins (NIMs).