With credit growth sliding for the fifth straight month in November, rating firm ICRA on Thursday pared its 2024-25 loan growth projection to 10.5%-11% from 11.6%-12.5% projected earlier.
The rating agency expects credit growth to slide further to around 9.7%-10.3% in 2025-26. A key factor behind the recent decline in credit growth is lenders’ curbing unsecured and personal loan growth, as the central bank has talked down ‘exuberant’ lending practices.
“The persisting high interest rates and the slowdown in credit growth (especially towards high-yielding advances) would impact the margins of the banking sector. Moreover, the rate transmission on yields is estimated to be faster as and when the rate cut cycle begins, which would further compress margins,” said Sachin Sachdeva, vice president and sector head, financial sector ratings, ICRA.
“Nevertheless, the return indicators are likely to remain healthy with return on assets (RoA) estimated at 1.1-1.2% for 2025-26 and at 1.2-1.3% for this year compared to 1.3% last year. With slower credit growth, this is likely to improve the loss-absorption cushions for banks, while remaining sufficient to meet the growth requirements,” he stated.
According to ICRA, although the capital ratios of several banks remain comfortable and no major growth-related capital requirement is expected for FY26, the implementation of the expected credit loss (ECL) framework and increased provisioning for project finance in the medium term is likely to be a monitorable.
“Raising deposits remains a challenging and costly proposition with the growth in deposits being driven by the expanding term deposits. At the same time, the certificates of deposit outstanding stood at its decadal peak at Rs. 4.9 trillion as on November 29, 2024, higher than the earlier peak of Rs. 4.5 trillion in April 2011. Despite the increase, these remain lower at 2.5% of total deposits compared to the peak of 8% of total deposits in the past,” it said.
Published – January 02, 2025 07:54 pm IST
