Banks may need to slow credit growth in FY25: S&P

Indian banks’ credit growth, profitability and asset quality would remain robust in the current fiscal, reflecting strong economic growth, but they may be forced to slow loan growth as deposits are not at a growing at a similar pace, according to S&P Global Ratings.

In the Asia-Pacific 2Q 2024 Banking Update, S&P Global Ratings Director SSEA Nikita Anand said the agency expects the sector’s strong credit growth to moderate to 14 percent in FY25, from 16 percent in FY24, as deposit growth, especially retail deposits, stay lukewarm.

Anand said there is a deterioration in the loan-to-deposit ratio at every bank, with loan growth exceeding deposit growth by 2 to 3 percentage points.

“We expect banks to reduce loan growth in FY25 and bring it in line with deposit growth. If banks don’t do that, they would have to pay more to get wholesale financing, which will impact profitability,” she said during a recent webinar. from S&P Global Ratings.

Overall, credit growth is led by private sector banks, which are registering growth of around 17 to 18 percent. Public sector banks, on the other hand, are seeing loan growth of between 12 and 14 percent.

Anand said Indian banks can support credit growth of as much as 15 to 20 percent over three years without having to raise capital. Loan growth is 2 to 3 percentage points higher than deposit growth in the banking sector.

“For India, we expect credit growth, profitability and asset quality to remain robust due to strong economic growth. Loan growth is 1.5 times nominal GDP growth, while deposit growth is in line with nominal GDP growth.

“Loan growth should come in line with deposits rather than exceed deposits. If credit growth does not slow, banks will have to finance it with large-scale financing and higher costs of such financing could put further pressure on margins and affect profitability,” Anand said.

First print: April 28, 2024 | 3:29 PM IST