Indian banks' credit growth, profitability and asset quality would remain robust in current fiscal reflecting strong economic growth, but they may be compelled to slow down their loan growth as deposits are not growing at a similar pace, S&P Global Ratings has said.
In the Asia-Pacific 2Q 2024 Banking Update, S&P Global Ratings Director SSEA Nikita Anand said the agency expects the sector's strong credit growth to moderate to 14 per cent in FY25, from 16 per cent in FY24, if deposit growth, especially retail deposits, remain tepid.
Anand said there is a deterioration in loan-to-deposit ratio in every bank, with loan growth being 2-3 percentage points higher than deposit growth.
"We expect banks to bring down their loan growth in FY25 and bring it in line with deposit growth. If banks do not do that, they would be paying higher to get wholesale funding, which will impact profitability," she said at a recent webinar of S&P Global Ratings.
Generally, loan growth has been led by private sector banks which see around 17-18 per cent growth, public sector banks on the other hand see loan growth in the range of 12-14 per cent.
Anand said Indian banks can support loan growth of as high as 15-20 per cent over three years without need for raising capital. The loan growth is 2-3 percentage points higher than deposit growth of the banking sector.
"For India, we expect credit growth, profitability and asset quality to remain robust reflecting strong economic growth. Loan growth is 1.5 times of nominal GDP growth, while deposit growth is in line with nominal GDP growth.
"Loan growth should come in line with deposits rather than outpacing deposits. If credit growth doesn't slow, banks will have to fund it from wholesale funding and higher cost of such funding could further strain margins and hurt profitability," Anand said.