The pace of credit growth of commercial banks in India is expected to moderate in the current financial year (FY25) to 12-14 per cent due to challenges in raising resources and regulatory concerns on unsecured credit. The moderation of credit growth will also be faced by the non-banking finance companies, according to global rating agency Moody’s and its Indian unit ICRA.

The stress in some segments of the loan portfolio will also impact credit growth, they said. According to Reserve Bank of India (RBI) data, banks reported a credit growth of 16.3 per cent in FY24, excluding the impact of the merger of HDFC with HDFC Bank.

The credit quality in India’s financial system has improved, with record-high profitability, low delinquencies, and domestic-oriented funding underpinning stable credit ratings.

Amit Pandey, a vice president and senior analyst at Moody’s, said at a joint media conference that bank loan growth is expected to be 12-14 per cent over the next 12-15 months as loans grow in line with deposits.

The RBI data for the fortnight ended May 17, 2024, showed the gap between credit and deposit growth rates is about 3.1 per cent. This excludes the impact of HDFC’s merger with HDFC Bank. The gap widens to 6.2 per cent if merger effects are factored in.

The net interest margins (NIMs) of banks are expected to soften selectively as banks re-price maturing deposits at higher rates to reflect previous increases in interest rates. They are estimated to decline by about 10-15 basis points. Still, the system-wide return on assets will remain healthy with low loan-loss provisions despite a slight increase from cyclically muted levels, while banks’ capitalisation will remain stable.

K Srinivasan, group head of financial sector ratings at ICRA, said the growth in the non-banking finance companies (NBFC) sector will moderate, especially in the non-mortgage retail loan segment, on the back of the high growth rates seen in the past two financial years. The personal and consumption loan segments, which grew at a steep rate in the previous two financial years, will experience relatively muted growth in the current financial year in light of regulatory actions on such loans.

The assets under management (AUM) of NBFCs excluding housing and infrastructure financing is expected to grow at a relatively muted but healthy rate of 17-19 per cent in FY25, compared with about 23-24 per cent in FY23 and FY24, he said.

The asset quality and earnings of NBFCs will likely weaken, with non-performing assets increasing by up to 30 basis points from March 2024 and earnings declining 20-40 basis points from FY24, as growth slows and the expectation of tighter liquidity keeps the cost of funds elevated, both rating agencies said.

The Reserve Bank of India’s initiatives to manage credit growth in high-risk segments such as unsecured loans, along with tighter scrutiny on areas such as customer protection, risk management, cyber security, and IT infrastructure, will enhance financial stability.

“For India’s financial institutions, leadership in technology adoption as well as their risk management, governance, customers’ experience, and balance-sheet buffers will separate winners from losers over the next two-three years,” Pandey added.

First Published: Jun 12 2024 | 7:41 PM IST