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Funding conditions in India may significantly impact loan growth for banks in the country, potentially leading to a moderation in credit expansion by 200 basis points in the upcoming fiscal year, according to S&P Global Ratings.
The rating agency anticipates a slowdown in system-level credit growth to around 14 per cent in FY25, beginning April 1, compared to the approximately 16 per cent annual growth witnessed in the first three quarters of FY24, with margins also expected to decline.
Despite strong credit demand and a conducive economic environment for growth, S&P highlights the lack of a deposit boom as a key challenge for Indian banks. If credit and deposit growth rates remain consistent, intensified deposit competition could further squeeze bank margins, particularly impacting private-sector banks (PVBs) operating at higher loan-to-deposit ratios (LDRs) compared to public-sector banks (PSBs). Additionally, the faster growth rate of PVBs exacerbates these pressures.
HDFC Bank, India’s largest private lender by market capitalization, faces additional strain due to its merger with Housing Development Finance Corp Ltd in 2023, resulting in a weakened funding profile. S&P suggests that HDFC Bank may require several years to return to its pre-merger funding levels.
Despite the challenges, S&P believes that rated private banks should be able to withstand the deterioration in their LDRs and margin pressure without experiencing a significant decline in their credit profile. However, Indian banks will need to strike a delicate balance between maintaining robust loan growth and acquiring deposits to fund that growth. If the competition for deposits intensifies further, banks may face either slimmer margins or slower growth.
(With Reuters inputs)
