Credit growth to dip to 12-13% in FY25 from 16.5% in early Dec 2023: ICRA

Tight liquidity, hike in risk weights to impact bank loan growth

With tight liquidity conditions weighing on business, the bank credit growth in India is likely to moderate to 12-13 per cent in the next financial year (FY25) from 16.5 per cent year-on-year in early December 2023, according to Icra.

Aashay Choksey, vice president at Icra, said incremental credit expansion has been robust so far at Rs 15.5 trillion (till December 1, 2023) in the current financial year, against Rs 18.2 trillion in FY2023. However, beyond this year (FY24), credit growth is likely to come off as tight liquidity conditions would eventually weigh down on growth.

Besides this, factors including weaker credit demand in the agriculture segment, subdued export demand, as well as the recent increase in risk-weights to the unsecured consumer lending and the Non-Banking Financial Company (NBFC) segments would also collectively temper credit traction, he said.

The rating agency has maintained a positive outlook on the banking sector, driven by comfortable asset quality levels, with both corporate and retail portfolios performing well in terms of delinquencies. This would mean limited net Non-Performing Assets (NPAs) additions. Furthermore, credit growth is expected to remain at 12-13 per cent in FY2025, driven by strong demand in the services and the retail segments.

These factors are likely to be offset by the continued upward repricing of the deposit base in H2 FY2024, leading to compression in interest margins. This repricing is likely to mostly happen by the end of FY2024. However, the expectations of a rate cut from August 2024 could start a downward pressure on lending yields and hence pressure on interest margins may continue during FY2025.

“Despite this, we expect the operating profits for banks to remain steady supported by the loan growth, however, operating profitability levels would witness a mild moderation and stabilise at 1.8-2.0 per cent in FY24-FY25 compared to 2.2 per cent in FY2023,” the agency added.

The gross-fresh NPA generation for the banking system is expected to witness a mild increase in FY2025 as portfolios gradually season, although the corporate book asset quality is expected to hold up and slippages are likely to remain granular. Despite the increase, the headline metrics of the banking sector would maintain an improving trajectory on steady recoverability and credit growth.

Icra expects the gross NPAs (GNPAs) to decline to 2.1-2.5 per cent by March 2025 from 2.8-3.1 per cent expected as of March 31, 2024, and 4.0 per cent as of March 31, 2023. The net NPAs are estimated to decline to 0.5-0.6 per cent by March 2025 from 0.7 per cent expected as of March 31, 2024, and 1.0 per cent as of March 31, 2023.