Ind-Ra-Mumbai-7 January 2025: India Ratings and Research (Ind-Ra) has maintained a neutral outlook on the overall banking sector for FY26. The agency believes the banking sector’s near-to-medium term challenges include an elevated loan deposit ratio (LDR), the potential impact of draft norms on liquidity coverage ratio, expected higher provisioning for the infrastructure sector and the introduction of expected credit loss norms.
Ind-Ra estimates system deposit growth of 12%-13% yoy for FY26, similar to FY25, with high competitive intensity for garnering low-cost current account savings account deposits. With the system LDR being highest over the past five years at 80% and term deposit rates near peak or peaking, the reliance on raising infrastructure bonds is likely to continue in the near term. Furthermore, the reliance on bulk deposits is likely to increase if the growth in granular deposits remains constrained, as credit growth, while being lower from recent peak, is still at healthy levels.
“Ind-Ra has maintained a neutral sector outlook for banks and a Stable rating outlook for private banks, public sector banks and small finance banks. Near- to medium-term challenges for the sector include dealing with elevated LDRs, potential impact of draft norms on liquidity coverage ratio and higher provisioning for the infrastructure sector and the introduction of expected credit loss norms. Profitability while being healthy is already at an inflexion point in FY25 and expected to moderate further in FY26 with an expectation of rising slippages and higher credit costs over FY24 levels which was at decadal lows”, says Karan Gupta, Head and Director Financial Institutions, Ind-Ra.
Credit growth has lost some steam (November 2024: 10.6%%; December 2023: 20.9%), largely due to the base effect and lower growth in retail and non-bank finance company (NBFC) segments post the regulatory changes from November 2023. Ind-Ra now expects credit growth of 13%-13.5% for FY25 and FY26, but the mix is likely to change with a continued slowdown in lending to NBFCs and the retail sector. This is likely to be offset by a revival in private capex, benefitting growth of the corporate segment.
Surge in LDRs Constraining Credit Growth, Incremental LDRs Moderating: Deposits in the banking system have continued to lag the system’s credit growth since FY22 (with average lag of 416bp), which has led to system LDRs gradually inching up to 80.4% in 1HFY25 from 70.0% in FY21. In Ind-Ra’s opinion, elevated LDRs might constrain the loan growth of banks in the medium term. The moderation in incremental LDRs can be seen in data as of 13 December 2024, where the loan growth and deposit growth for the system moderated to 11.5% each from 20.0% and 14.0%, respectively, in 2023. Incremental LDRs moderated to 71% and 79% in 2024 on YTD and YoY basis, respectively, from 119% and 108% in 2023.