Deposits paucity may hit Indian banks credit growth in FY25: Report

Private lenders with high loan-to-deposit ratio more vulnerable, says S&P

Challenges in mobilising deposits to meet loan demand may hit bank credit growth in India in the next financial year (FY25). Credit growth may slip to 14 per cent year-on-year (YoY) in FY25 compared to 16 per cent till December 2023, said S&P Global Ratings on Thursday.

“Credit demand is strong. The economic backdrop is highly conducive to growth. Asset quality is improving, buoyed by a confluence of supportive structural and cyclical factors. All that India's banks are missing is a boom in deposits,” said S&P in a statement.

Funding conditions will play a “crucial role” in constraining loan growth for many banks in the country. “We expect system-level credit growth to moderate to 14 per cent in fiscal 2025 (ending March 31, 2025), from about 16 per cent year-on-year growth in the first three quarters of fiscal 2024. Margins are also set to fall,” said the ratings agency.

 

If credit and deposit growth rates are steady and a period of “deposit competition” looms, bank margins may decline to 2.9 per cent from 3 per cent in FY25.

Private sector banks are likely to “bear the brunt of the situation”, as they are already operating at much higher loan-to-deposit (LDR) ratios. Adding to the stress is the fact that these lenders are growing much faster than the public sector banks, said Deepali V Seth Chhabria, credit analyst at S&P Global Ratings. "Deposit competition could get fiercer than our base case assumes, if lenders don't pull back on credit growth. Private banks' LDR could cross 97 per cent by March 2026 in our alternate scenario of 18 per cent credit growth.”

The hit to net interest margins for the system could double in this scenario, falling 20 basis points to 2.8 per cent, and this could translate into a 10-15 basis points impact on the return on average assets, said Geeta Chugh, another credit analyst at S&P.

A surge in credit growth has pushed Indian banks' ratio of loans to deposits to a two-decade high; growth beyond this level will either come more slowly or be more expensive, said S&P’s report.