Mumbai: Credit growth in India could moderate to between 12% and 14% in FY25, S&P Global Ratings said, because of inflated funding costs amid intensifying competition to garner funds.
Separately, the share of unsecured loans is expected to rise despite the central bank-mandated increase in risk weighting for such exposures. Moderation in credit growth will lead to a rise in loan to deposit ratios compared with March 2023 levels. Private sector banks, in particular, have seen a sharp rise in loan to deposit ratios 90% to 95%. Banks have been relying on bulk or wholesale deposits to fund growth.
Higher costs of wholesale funding will increase pressure on net interest margins and affect profitability. “Indian banks will have to strike a fine balance between maintaining strong loan growth and paying more for deposits to fund that growth,” the S&P report said.
For credit cards and unsecured loans, growth declined slightly to 22.3% in December 2023, compared with 23.6% in November 2023. This is because the pricing for such loans has increased marginally, the report said.
“Unless pricing dynamics change significantly, we expect that the share of such loans in the banks’ total loan book could continue to rise. This will also help banks to partly mitigate the downside risks to margins from tighter liquidity,” said the report.
