Bank deposit growth may struggle to keep pace with credit momentum: S&P

Investors may seek higher risk premium for increased regulatory risk

The bank deposit growth in India may struggle to keep pace with good credit momentum in 2025, raising the risk of weakening credit-to-deposit ratios. However, despite this, banks' overall funding profiles should remain sound, according to S&P Global Ratings.

 

The pace of deposit mobilisation by banks moderated to 11.82 per cent on a year on year basis as of November 1, 2024, from 13.5 per cent a year ago, says the Reserve Bank of India (RBI) data.

 

The credit expanded by 11.9 per cent Y-o-Y against 20.4 per cent a year ago. These figures factor in the merger of HDFC with HDFC Bank.

 

The rating agency in its outlook for 2025 said the competition for deposits and a shift to higher interest-bearing term deposits will squeeze net interest margins to 3.0 per cent in the financial year 2025 from 3.2 per cent in the financial year 2024.

 

The agency expects loan growth to be slightly higher than the nominal growth rate of the Indian Gross Domestic Product (GDP), with retail loans expanding the fastest. Corporate borrowing has gained momentum, but uncertain external conditions may delay capital expenditure-related growth, it said.

 

India's infrastructure spending and private consumption will support robust economic growth. “We forecast GDP will expand 6.5%-7% annually in financial years 2025-2027 (year ending March 31). India's good economic growth prospects will continue to support banks' asset quality,” S&P said.

 

The asset quality of Indian banking entities will stabilise. “We project the banking sector's weak loans will decline to about 3.0 per cent of gross loans by March 31, 2025, from our estimate of 3.5 per cent as of March 31, 2024.

 

Strong regulatory actions to dent earnings, reputation

 

Turning to regulatory steps to strengthen the financial sector in India, S&P Global Rating said the Reserve Bank of India was becoming more vocal and imposing heavy penalties.

 

It is heavily focusing on technology, compliance, customer complaints, data privacy, governance, and know-your-customer issues.

 

“We believe increased transparency will enhance compliance and governance practices and curtail lenders' over-exuberance, but compliance costs will rise,” it said.

 

“Investors in the financial sector may seek a higher premium for the increased regulatory risk stemming from the potential for tighter penalties, such as business embargoes, which can dent a company's earnings and reputation,” it said.