In the last couple of years, lenders saw a strong growth in credit. Generally, the loan growth was way ahead of deposit growth. But, with regulatory measures, it has slowed for commercial banks. On the other hand, non-banking finance companies (NBFCs) are also feeling the pinch as banks tighten the funding tap.
Over the last couple of years, there has been a massive surge in retail credit. But, the surge in unsecured lending hasn't gone down well with the Reserve Bank of India, which tightened norms for such loans last year. That has had the intended impact.
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Separately, earlier this year, the RBI released a draft circular proposing to tighten norms related to liquidity coverage ratio by increasing the run-off factor (banks would have to set aside more liquid assets to tide over potential spikes in deposit withdrawals). That could additionally weigh on credit growth, should they take effect from April 2025.
Credit rating agency ICRA estimates incremental bank credit to slow down to around Rs 19.0–20.5 lakh crore, up 12 per cent in the current financial year ending March 2025. In the previous financial year, bank credit grew 16.3 per cent to Rs 22.3 lakh crore.
NBFCs are likely to see a sharper slowdown in their assets under management this year, with the AUM growth at 16–18 per cent for the 2024–25 period from 25 per cent in 2023–24.
The Reserve Bank has taken regulatory action against several financial entities over the last few months, which is expected to push others to adjust their business practices and models. This will also have a bearing on near-term credit growth, noted ICRA.
It pointed out that the share of the retail segment and the NBFCs in the incremental credit flow of banks had already declined to 42.9 per cent in 12 months ending August 2024 from 48.9 per cent in the same period a year ago. As a sizeable portion of bank credit flow to the NBFCs is towards on-lending to the retail segments, overall credit to the retail segment may slow down in the next 12–18 months.
"As bank funds constitute a larger share in the overall funding of NBFCs, a slower credit flow from banks to the NBFCs will also compress their AUM growth. The NBFCs in unsecured and digital lending businesses shall face a higher squeeze in funding compared to others," said AM Karthik, senior vice-president and co-group head of Financial Sector Ratings at ICRA.
Over the last few years, banks also saw a decline in their non-performing assets (NPAs). While the headline gross NPAs in percentages are still expected to remain under control, asset quality pressures are expected to rise in certain segments.
"Incrementally, the denominator is still growing. While we are expecting a slowdown in growth, 12-13 per cent is a good enough increase. Operating profitability for banks is still fairly decent. So they will have adequate resources to make provisions for write-offs. So, to that extent, the headline numbers may not see a marked spike up. But, you will see certain segments like unsecured or retail, and those segments are showing a spike," said Karthik Srinivasan, group head of Financial Sector Ratings at ICRA.
In the last two years, the high credit growth in the retail segment has potentially resulted in overleveraging in some asset segments, ICRA noted, adding that slower credit growth can impair the refinancing ability of some of these borrowers, as the lenders become risk-averse. This tightening often results in weaker borrowers falling behind in their repayments schedule, in turn increasing the asset quality pressure for the lenders, it said.
High-yielding loans or marginal borrowers (like micro-loan borrowers or a notch better) segments are where signs of stress are, said ICRA officials.
"Today, what we are seeing is stress, which is present in the unsecured segment. We have to see whether this stress spills over to the secured assets segment where the borrower may be similar, so let us say, tractor, used passenger vehicles micro-LAP (loan against property), apart from the credit cards and unsecured loans," said Anil Gupta, senior vice-president and co-group head of Financial Sector Ratings at ICRA.
The ratings agency expects the RBI to start cutting interest rates only from the February monetary policy committee meeting. It sees the MPC cutting the benchmark repo rate by 25 basis points in February and another 25 basis points in April.
ICRA officials feel that banks may not cut deposit rates immediately, even after a repo rate cut, as banks will try to shore up retail and small deposits in a way that recoups the loss on the LCR side.