CRISIL analysis: Three things that could curb bank credit growth this year

Bank credit growth is expected to moderate this financial year after a robust 16 per cent  estimated for last financial year, driven  by strong economic activity and retail credit demand. 

There are three reasons for this: a statistical high-base effect given the strong growth seen last financial year, revision in risk weights by the Reserve Bank of India (RBI), and relatively slower economic activity. 

The RBI’s increase in risk weights on bank lending to non-banking financial companies (NBFCs) and on unsecured loans has pruned credit growth in these segments. Further, an expected moderation in growth in the country’s gross domestic product from 8.2 per cent last financial year to 6.8 per cent in the current financial year will also have a sobering effect on credit growth. 

Thus, corporate credit growth is likely to be lower than last financial year, given reduced bank exposure to NBFCs, previously one of the fastest-growing sectors. Retail lending will also feel the drag in unsecured consumer credit, and the higher base created by the merger between HDFC and HDFC Bank. 

A key area to watch out for is deposit growth. Recent months have seen convergence of credit growth with deposit growth, a significant narrowing from about 300 basis points (bps) last financial year and an even wider about 500 bps in financial year 2023. 

The primary reason for this is slowing credit growth, so whether the trend sustains needs to be seen. It is important that deposit growth does not lag too far behind credit growth. 

Asset quality trends are benign, with gross non-performing assets (NPAs) expected to gravitate downwards to about 2.5 per cent as on March 31, 2025, from 2.8 per cent as on March 31, 2024, and 3.9 per cent as on March 31, 2023. The picture in the corporate segment is likely to keep improving, with gross NPAs expected to fall below 2 per cent from a peak of about 16 per cent as on March 31, 2018, because of a significant clean-up by banks and stronger risk management and underwriting norms. The health of corporate India has also improved with secular deleveraging over the past few financial years. Retail NPAs could witness some uptick, primarily due to unsecured loans, but should remain range bound.  

In terms of capitalisation, the banking sector has adequate buffers and is well placed to grow over the  medium term.  

On the profitability side, banks will see their return on assets (RoA) dip 10-20 bps to 1.1-1.2 per cent this financial year after touching a 20-year high of 1.3 per cent last financial year. 

However, it will still be healthy compared with the long-term sectoral average of 0.75 per cent over 20 years (average of 0.5 per cent over the past 10 years).  

Overall, the banking sector’s health is stable, backed by comfortable capitalisation and improvement in asset quality.

 

NBFC growth to taper off a high amid evolving operating and regulatory environments; balance sheets remain supportive 

Growth in assets under management (AUMs) of NBFCs (include housing finance companies (HFCs) but exclude government-owned NBFCs; HFCs exclude HDFC) is set to  moderate to 15-17 per cent in the current and next financial years, a 600-800 bps decline from a strong 23 per cent growth seen last financial year, as they navigate the dynamics of the evolving operating and regulatory environments and recalibrate strategies.

 

The expected moderation is on account of three factors. First, rising concerns around household indebtedness and asset quality risks will have a bearing on growth strategies in specific retail asset segments such as microfinance and unsecured loans. Second, regulatory compliance requirements have intensified with focus sharpening on customer protection, pricing disclosures and operational compliance which will necessitate process recalibration. And third, the access to diversified funding sources, a crucial determinant of growth, especially given the slowdown in bank lending to NBFCs, will differ across NBFCs.

 

The assets under management of NBFCs will grow in the two largest traditional segments — home and  vehicle loans (together constituting about 45 per cent of their AUM) — driven by fundamentals. Home loans are  expected to maintain a relatively steady compound annual growth rate (CAGR) of 13-14 per cent over this and next financial year, while vehicle loans will clock about 15-16 per cent over this period.

 

On the other hand, the unsecured loans and microfinance segments, together accounting for about 23 per cent of the overall AUM of NBFCs, are expected to be impacted the most.

 

Unsecured lending growth is seen moderating to 15-16 per cent in this and next financial years from a CAGR of about 45 pre cent in the past three financial years, due to potential concerns about rising delinquencies. The asset quality of unsecured  loans, primarily lower ticket sizes, will have to be watched as it is an inherently vulnerable borrower  segment.

 

The microfinance segment is also facing asset quality headwinds, so its growth is expected to be muted  this fiscal, with a cautious recovery pencilled in for next fiscal. The segment had grown about 25 per cent last financial year. Microfinance asset quality has been impacted due to a combination of factors, including over-leveraged  borrowers, debt waiver campaigns and ground-level challenges on account of elections, intense heat wave  and continued high attrition of the field staff.

 

Asset quality is expected to remain largely stable across other NBFC asset segments like home loans, vehicle loans and loans against property.

 

For NBFCs, funding diversification remains imperative as incremental bank lending to NBFCs slowed after  the change in regulatory risk weights. NBFCs (excluding housing finance companies or HFCs) have been  increasing the share of external commercial borrowings, securitisation and non-convertible  debentures in their resource mix to diversify their borrowing profile. HFCs have seen a rise in the  share of refinance from the National Housing Bank. Nevertheless, to significantly reduce reliance on bank  funding, NBFCs and HFCs will need to tap the domestic debt capital markets, which may be more  challenging for mid-sized and smaller players.

 

Amid this, the capital structure of NBFCs remains healthy, supported by strong internal accruals and  sizeable equity raises in the last few years. The debt-equity ratio remains controlled at 3.7 times for NBFCs  (excluding HFCs) and 4.6 times for HFCs as on September 30, 2024.

 

Profitability, as measured by return on managed assets, is expected to remain healthy, too, despite  a moderate decline due to a rise in credit costs. Net interest margins should remain steady for the sector even as the potential rate cut will have a differential impact on various players depending on the relative  share of floating rate assets and liabilities on the books. Overall, RoMA is expected to be around 2.3 per cent in this and next financial year.