The Indian banking sector’s rating has been revised by ICRA, a rating agency, from positive to stable. This revision comes with the expectation that credit growth and profitability metrics will moderate in FY25, while still maintaining a healthy status. A stable outlook suggests that there is a low probability of a rating change in the near to medium term. ICRA predicts that credit growth in FY25 will range from 11.7% to 12.5%, compared to the 16.3% seen in FY24. Read: Banks in India face worst Deposit Crunch in last 20 years.
ICRA highlights the challenges faced in deposit mobilization and regulatory measures aimed at slowing down credit growth for consumer credit and non-banking finance companies (NBFCs). As a result, it is expected that expansion will be modest, reaching ₹19.0-20.5 trillion in FY25. This figure would be the second-highest credit expansion ever recorded, following the ₹22.2 trillion expansion in FY24. The compression of interest margins over the last 18 months due to rising deposit costs further adds to the pressure. Additionally, expectations of a rate cut in the second half of FY25 could lead to margin pressure through a likely downward repricing of advances.
The banking sector is currently facing the challenge of a robust credit growth and a slowdown in deposits, impacting the credit deposit ratio (CD ratio) of banks. The CD ratio is estimated to have reached a six-year high of 78% (excluding the HDFC merger) as of March 22, 2024. This is higher than the 75.7% recorded in 2023. ICRA states that this situation poses significant challenges for banks to pursue credit growth as their on-balance sheet liquidity has been directed towards strong credit growth in the past two years. In FY25, the CD ratio is projected to remain elevated at over 80% (including the HDFC merger). While some private banks may experience a decline in this metric, certain public banks may see an increase in their CD ratio.
Analysts anticipate a competitive battle among banks for deposits. Despite the challenging environment, it is unlikely that banks will raise deposit rates significantly. Karthik Srinivasan, senior VP & group head of financial sector ratings at ICRA, suggests that deposit rates may have peaked, with some rates frozen and unlikely to rise significantly. However, some banks may opt for a tactical shift and increase rates, especially for short-term deposits. Currently, the average deposit rates stand at around 7% for a one-year period.