In a recent update on the banking sector in the Asia-Pacific region, S&P Global Ratings has projected that Indian banks will sustain robust credit growth, profitability, and asset quality in the current fiscal year, buoyed by the nation's strong economic trajectory.
The agency warns that banks might face the necessity to temper their loan expansion plans due to a disparity in the pace of deposit accumulation.
S&P Global Ratings Director SSEA, Nikita Anand, emphasized during a webinar that while credit growth in the sector is expected to remain formidable, it could see a moderation to 14 percent in the fiscal year 2025 from the current 16 percent in FY24.
Anand highlighted the significance of deposit growth, particularly in retail deposits, highlighting that tepid growth in this area could prompt a need for adjustments in loan expansion strategies.
Anand noted a concerning trend of loan-to-deposit ratio deterioration across all banks, with loan growth surpassing deposit growth by 2-3 percentage points.
Should this trend persist unchecked, banks may find themselves resorting to higher-cost wholesale funding, thereby denting profitability.
Historically, private sector banks have spearheaded loan growth, experiencing rates of 17-18 percent, while public sector counterparts have witnessed growth in the range of 12-14 percent.
Despite the challenges posed by deposit dynamics, Anand expressed confidence in the banking sector's ability to sustain loan growth of 15-20 percent over three years without necessitating capital raises.
Anand concluded by reiterating the need for credit growth to harmonize with deposit growth, warning that failure to do so could strain banks' margins and hinder their profitability amid the backdrop of strong economic growth in India.
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