Mumbai: Fitch Group company India Ratings & Research (Ind-Ra) on Thursday said that it has maintained a neutral outlook on the banking sector, with lenders likely to face challenges in mobilising deposits while ensuring a minimal impact on margins.
“The lagging deposit growth will be the key theme for banks in FY25 as this has resulted in loan to deposit ratio increasing above 80%. Further, the improving return on assets over FY21-24 is likely to reach an inflexion point with some pressure on margins and credit costs reaching multi-year lows,” said Karan Gupta, head and director of financial institutions at India Ratings.
Since mid-2022, bank credit growth has consistently outpaced deposit growth, exerting pressure on lenders to mobilise funds to finance the robust loan demand.
India Ratings projects deposit growth in the banking system at 12-13% on-year in the next financial year, marginally lower than 13.8% on-year in the current financial year. The rating agency predicted “high competitive” intensity among banks, especially for garnering low-cost current account savings account deposits.
Meanwhile, the rating agency estimated bank credit growth at 15% on-year in FY25, saying that lending to NBFCs and the retail sector would likely slow down. However, credit growth would be supported by a revival in private capex benefitting the growth of the corporate segment. For NBFCs the rating agency said that while profit margins would remain under pressure, overall profitability would be managed through driving efficiency in fee income, operating expenses and credit costs. Ind-Ra expects 10 large diversified NBFCs to grow 20% on-year in FY25 from 27% this year.
“Regulatory scrutiny and compliance have been the ongoing need of the hour for NBFCs. This is because they are scaling up and their dependence on and interconnectedness with banks is increasing, where the regulator has been building guardrails,” the firm’s analysts said.
