ICRA revises down FY25 banking outlook to stable on moderate credit growth

Mumbai: Forecasting a moderation in credit growth at 11.7-12.5 percent from 16.7 percent in FY24, and a likely compression in margins as liability prices keep going up, the rating agency ICRA on Wednesday revised down their outlook for the banking sector to stable from positive.

“We expect incremental credit growth to moderate to Rs 19-20.5 trillion in FY25, clipping at a 11.7-12.5 percent over FY24 as the credit to deposit ratios are highest since December 2018,” agency’s senior vice-presidents Karthik Srinivasan and Anil Gupta told reporters.

“Further, we also expect a moderation in the credit growth and profitability metrics, though the same would continue to remain healthy. Accordingly, we are revising down the sectoral outlook to stable from positive,” they said.

On the expected compression in interest margins, driven by rising deposit cost, they said expectations of a rate cut in the second half of the fiscal can also lead to margin pressure, due to a likely downward repricing of advances. But despite this, loan growth will translate into steady operating profit, aided by benign credit cost.

Their forecast for moderate credit growth stems from the impact of the regulatory measures on unsecured consumer credit and bank lending to non-banking finance companies. This will have incremental loan sales of Rs 19-20.5 trillion or an on-year growth of 11.7-12.5 percent, down from 16.3 percent in FY24 when the industry added over Rs 22.2 trillion to credit outstanding, which was the highest-ever.

The credit to deposit (CD) ratio is estimated to have risen to 78 as of March 22, 2024, which is the highest since December 21, 2018 when it was 77.9 and much higher compared to 75.7 as of March 24, 2023, and 71.9 as of March 25, 2022.

With an elevated CD ratio, competition for deposits is likely to remain high even in FY25, which will limit banks’ ability to cut their deposit and lending rates. And if the RBI cuts repo rate, it will pose more challenges to banks net interest margins, they added.

On the asset quality front, the agency expects incremental loan growth will lead to an improvement in the headline asset quality metrics and sees gross and net NPAs declining to 2.1-2.3 percent and 0.5-0.6 percent, respectively, by March 2025 from 3 percent and 0.7 percent, respectively in FY24, which would the best in over a decade.

Credit costs are seen remaining steady at 0.8 percent of advances in FY25, as in FY24. This should allow banks to comfortably withstand a compression in the interest margins, which will lead to a mild moderation in the return on assets to 1-1.1 percent in FY25 from an estimated 1.2 percent in FY24.