Icra slashes credit growth for FY25, says slump to continue in next fiscal
MUMBAI: With the economy having lost steam in the first half, and the second half not seeming to offset the losses booked earlier, banks are set to face headwinds on the credit demand side. Another dampener is the steep slowdown in personal loans and loans to non-banks. This has led rating agency Icra to revise down its forecast for credit growth to 10.5-11% for FY25 from its earlier estimate of 11.6-12.5%. The agency also sees the slump continuing into the next fiscal with 9.7-10.3% growth.
Though Icra also sees a downward trend on the profitability side in these fiscals, since the return indicators are expected to remain comfortable, it has retained the stable outlook for the sector.
Revising downwards the credit growth estimate for FY25, Icra attributed this to banks’ focus on reducing their credit-to-deposit ratio and reducing their exposures to unsecured retail and non-banking financial companies. This rebalancing of the CD ratio will continue for some more time.
In FY26, credit growth may ease to 9.7-10.3% weighed down by the persisting high CD ratio and implementation of the proposed changes in the liquidity coverage ratio framework, it added.
According to Sachin Sachdeva, head of financial sector ratings at the agency, the persisting high interest rates and slowdown in credit growth, especially in the high-yielding advances segments like personal loans, will impact the margins of banks. And if there is an interest rate cut, that will further crimp margins. However, slower credit growth will help improve the loss-absorption cushions of banks.
With the persisting challenges in deposit mobilisation, the bond issuances by banks are expected to surpass previous highs and may touch Rs 1.3 trillion in FY25 (Rs 1.09 trillion till December) compared to Rs 1.02 trillion in FY24 and Rs 1.13 trillion in FY23, he added.
On the asset quality front, net additions to NPAs remain low, which has helped lenders witness steady reduction in headline NPA numbers. However, with the retail sector facing increasing stress, the overall fresh slippages are expected to rise, and recoveries/upgrades are likely to gradually taper.
The gross fresh NPA generation for all banks is expected to marginally rise to 1.6 percent in FY25, from 1.5 percent in FY24, and 2 percent in FY23, 3.1 percent in FY22 and the downward trend is expected to continue in FY26.
Though the fresh NPA generation rate is expected to see a relative increase in FY25 and FY26, credit costs will see only a mild rise because of lower legacy net NPAs. Moreover, with the existing high provision coverage ratio, banks would have room to take lower incremental provisioning to manage the bottom line, said Sachdeva. The credit costs are expected to account for 21-23 percent of the operating profit system level in FY25 and 27-30 percent in FY26, compared to 100-150 percent during FY18-20, he added.