India Ratings Forecasts Bank Credit Growth Of 15.4% For FY25

Public sector banks have already sanctioned higher amounts to the industry segment, a trend expected to materialise in the first half of the current fiscal year

Credit growth in the industry segment peaked in October 2022 at 16.4 per cent year-on-year

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A loan growth of 15.4 per cent for banks in FY25 has been projected by India Ratings. The rating agency further anticipates that an upturn in private capital expenditure could counterbalance any potential pressure on 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. 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," the rating agency said in a note.

As of May 31, 2024, the credit growth of the banking system (excluding the merger of HDFC Ltd with HDFC Bank) was 16.1% year-on-year. Including the impact of the HDFC merger, the banking system's credit growth stood at 19.8% as of the same date.

Credit growth in the industry segment peaked in October 2022 at 16.4 per cent year-on-year, then declined to 5.2 per cent year-on-year by July 2023 before rebounding to 6.9 per cent in April 2024.

The recovery was primarily driven by the large industry segment, which constitutes approximately 71 per cent of the industry and grew by 4 per cent in April 2024. Additionally, the micro and medium segments continue to show positive growth trends, with year-on-year growth rates of 15.6 per cent and 13.3 per cent, respectively, as of April 2024.

Public sector banks have already sanctioned higher amounts to the industry segment, a trend expected to materialise in the first half of the current fiscal year. This growth is primarily driven by sectors such as manufacturing under the Production-linked Incentive scheme, renewables, and infrastructure, according to the rating agency.

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

Meanwhile, deposit growth in the Indian banking system continued to lag behind credit growth at 15.3 per cent but showed improvement to 12.2 per cent year-on-year as of May 31, 2024. However, the composition of deposits has shifted due to higher policy rates and increased rates on term deposits by banks.

The repricing of term deposits has widened the interest rate differential between term deposits and Current Account Savings Accounts (CASA), underscoring the growing importance of CASA deposits. India Ratings noted that with the current interest rate cycle expected to reverse in the second half of FY25, funds could potentially flow back into CASA balances, depending on the progress of the cycle.