Credit growth in India to moderate to 14% in FY25: S&P Global

Credit growth in India is expected to moderate to 14 per cent in FY25 from the existing 16 per cent as deposit growth is unable to keep pace with loans, a global rating agency said in a report.

"Deposit tightness will remain a system overhang. Our base case is for loan growth to slightly moderate, leading to manageable competition for deposits. Indian banks will have to strike a fine balance between maintaining strong loan growth and paying more for deposits to fund that growth," S&P Global Ratings said. If the clash for deposits gets fiercer, Indian banks will take a hit, either with slimmer margins or slower growth, it said.

"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," it said.

As per the report, system-level credit growth to moderate to 14 per cent in 2024-25 from about 16 per cent year-on-year growth in the first three quarters of FY24.

"If credit and deposit growth rates remain steady, a period of deposit competition looms, squeezing bank margins to 2.9 per cent from 3 per cent. Private-sector banks are likely to bear the brunt of the situation, as they are already operating at much higher Loan-to-Deposit Ratio (LDR)," said S&P Global Ratings credit analyst Deepali V Seth Chhabria.

Adding to the stress on the private-sector banks, the lenders are growing at a much faster pace than public sector banks, she added. Deposit competition could get fiercer than what the base case assumes, if lenders don't pull back on credit growth, it said.

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, it said.

With regard to capital adequacy ratio, the report said, most of India's banks can support loan growth as high as 15-20 per cent for the next three years without need for large capital raising.

Banks have bolstered their capitalization in the past few years following several stints of fund raising and government infusions into the public sector banks (PSBs). Improved profitability has also supported banks' capital formation.

Meanwhile, S&P Global announced the launch of the ‘India Research Chapter,' an initiative to fuel India-oriented research and reports. This initiative brings together experts from across divisions and functions of S&P Global and CRISIL (An S&P Global company).

The India Research Chapter will develop insights focusing on the opportunities, risks and potential for India to strengthen its claim towards becoming the third largest economy in the world by 2030, it said in separate statement.

As part of the S&P Global India Leadership Council, the newly unveiled India Research Chapter will be guided by a team of experts covering a wide array of themes including economics, technology, generative AI, banking, finance, automotive, country risk, capital markets, supply chain, energy transition, infrastructure, and sustainability, among others.