Systemic loan growth will decelerate to 12.5% in FY25, with private banks and public sector banks (PSBs) expected to see reduced growth rates, driven by a continued slowdown in unsecured retail lending and weaker corporate credit demand.
The high credit-deposit (CD) ratio across the banking system is also constraining banks’ ability to pursue aggressive credit growth. Although the gap between deposit and credit growth has narrowed from a peak of 8.8% in November 2022 to 3.5% currently, regulatory scrutiny on Loan-to-Deposit (LDR) and Liquidity Coverage Ratios (LCR) is anticipated to further dampen loan growth.
The overall credit growth estimate for private banks has been cut by 210 basis points (bps), while PSBs’ growth estimates have been trimmed by 112 bps for FY25. The differential between credit and deposit growth is projected to narrow to less than 100 bps over the year. Consequently, PSBs are likely to experience a slower pace of market share loss as their growth remains relatively stable due to more comfortable LCR and CD ratios.
“We remain vigilant about margins and the delinquency cycle in unsecured loans and factor in a marginal increase in credit cost for private banks and SBIN. For our coverage universe, we anticipate banks to achieve decent earnings growth of 15% in both FY25E and FY26E. For private banks, we expect YoY growth of 11% in FY25E and 16% in FY26E. For PSBs, we estimate growth of 19% in FY25E and 14% in FY26E,” Motilal Oswal Financial Services said in a report.
Q1 trend
The first quarter of FY25 has shown a trend of slower deposit growth, which has placed pressure on credit growth across many banks. Most banks, particularly private ones, have reduced their credit growth guidance, while PSBs have largely maintained their projections. This has led to a downward revision of loan growth estimates across the board, with reductions ranging from 41 bps to 360 bps for FY25 and 8 bps to 230 bps for FY26.
PSBs have outperformed private banks in terms of recovery trends, with private banks’ market share gains slowing significantly. The growth differential between private banks and PSBs has narrowed as PSBs recover from challenges like the Prompt Corrective Action (PCA) framework and asset quality issues. PSBs’ strong liquidity positions and controlled CD ratios are further enabling steady growth, and they are expected to maintain a market share of 56-57% by FY26.
Retail and services growth drivers
The retail and services sectors continue to be key drivers of loan growth, with year-on-year increases of 16.6% and 17.4%, respectively, excluding HDFC Bank. Despite slower growth in the industrial sector, robust performance in these segments, coupled with steady agricultural lending, has supported overall credit growth. The share of retail loans in total systemic credit has increased from 27-28% to 33% over the past four years and is expected to reach 35% by FY26.
However, a slowdown in unsecured retail lending has slightly moderated overall retail credit growth. Despite this, the potential for expansion remains as the economy continues to formalize, and retail credit’s share of total credit is expected to grow further.
Elevated CD ratios
Banks continue to grapple with an elevated systemic CD ratio, which stands at 79.1%, despite efforts to curb it. The high ratio underscores the need for banks to focus more on growing their deposit base. Tighter competition for deposits and slower credit growth may be necessary to manage the elevated CD ratio. The gap between credit and deposit growth has narrowed to 3.5% as of August 2024, down from 8.8% in November 2022, and is expected to narrow further to less than 100 bps by the end of FY25, mainly due to slower growth in private banks.
The incremental CD ratio remains high, reaching 113% in FY24, with PSBs operating at an even higher incremental Loan-to-Deposit Ratio (LDR). PSBs have benefited from their lower outstanding CD ratios, providing more flexibility for expansion. However, with limited options to adjust Statutory Liquidity Ratio (SLR) and LCR to fund credit growth, banks may increasingly shift their focus to deposit mobilization, potentially leading to higher funding costs and impacting margin trajectories.
