Indian banks' margins set to fall, credit growth to moderate in FY25: S&P

Funding conditions in India are likely to play a crucial role in constraining loan growth for many banks in the country, and credit expansion could moderate by 200 basis points in the next fiscal year, S&P Global Ratings said in note on Thursday.

The rating agency expects system-level credit growth to moderate to 14% in FY25, starting April 1, from about 16% annual growth in the first three quarters of FY24, with margins also set to fall.

"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," the rating agency said.

"All that India's banks are missing is a boom in deposits."

If credit and deposit growth rates remain steady, a period of deposit competition would loom and further squeeze bank margins, it said.

"Private-sector banks (PVBs) are likely to bear the brunt of the situation, as they are operating at much higher LDRs (loan-to-deposit ratio) as compared with the public-sector banks (PSBs) and many PSBs have better deposit franchise," S&P said.

"Adding to the stresses on PVBs, the lenders are growing at a much faster pace than the PSBs."

HDFC Bank is under extra pressure due to its merger with Housing Development Finance Corp Ltd in 2023, resulting in a weakened funding profile. The entity, India's largest private lender by market capitalisation, may need several years to revert to its pre-merger levels, said S&P.

S&P expects system-wide net interest margin to slip to 2.9% in FY25 from 3% in the current fiscal year. However, S&P said rated private banks should be able to withstand the deterioration in their LDRs and pressure on margins without any major decline in their credit profile.

"Indian banks will have to strike a fine balance between maintaining strong loan growth and paying more for deposits to fund that growth. If the clash for deposits gets fiercer, Indian banks will take a hit, either with slimmer margins or slower growth."