ICRA, a rating agency, has revised its outlook for Indian banks for Financial Year 2024-25 (FY25). The agency has changed the outlook from "positive" to "stable" due to the expected moderation in credit growth and profitability. However, the overall profile of the banking sector is expected to remain healthy. Sachin Sachdeva, who is the vice-president and sector head at ICRA, has stated that challenges in deposit mobilisation and regulatory measures might slow down growth in consumer credit. Moreover, non-banking financial companies (NBFCs) are also expected to reduce their expansion to Rs 19.0 to 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.
The banking sector has experienced a compression in interest margins due to rising deposit costs over the last 18 months. However, there is an expectation of a rate cut in the second half of FY25, which could lead to margin pressure driven by a likely downward re-pricing of advances. Despite margin compression, loan book growth is expected to translate into steady operating profits, aided by benign credit costs. This growth in loan book is expected to drive healthy earnings that will mostly be sufficient for most banks to meet their regulatory and growth capital requirements.
As of 22 March 2024, 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. This ratio is the highest since 21 December, 2018 (77.9 per cent), and much higher compared to 75.7 per cent as on 24 March last year and 71.9 per cent as on 25 March 2022. The sector's C/D ratio is likely to remain high at over 80 per cent (including the HDFC merger) in FY25, posing challenges for banks as they have deployed their on-balance sheet liquidity for strong credit growth in the last two years.
The competition for deposit mobilisation is expected to remain high, even during the plate_number_1 period, which will limit the banks' ability to cut their deposit and lending rates. If the policy rates are cut during this time, it will pose significant challenges to banks' net interest margins. The C/D ratio may decline for some private banks and increase for certain state-owned lenders. Icra suggests that loan book growth is likely to drive healthy earnings, which will largely be sufficient for most banks to meet their regulatory and growth capital requirements.