India Banks' Lending Growth May Moderate, Deposit Push To Squeeze Margins: S&P Report

S&P Global Ratings expects funding conditions to play a crucial role in constraining loan growth for many banks in the country, as per a report on Thursday.

"We expect system-level credit growth to moderate to 14% in FY25, from about 16% year-on-year growth in the first three quarters of FY24," it stated. Margins are also set to fall, according to the ratings agency.

Credit demand is strong. The economic backdrop is highly conducive to growth. Asset quality is improving, buoyed by a confluence of supportive structural and cyclical factors. All that India's banks are missing is a boom in deposits.

If credit and deposit growth rates remain steady, a period of deposit competition looms, squeezing bank margins to 2.9% from 3%, S&P Ratings explained.

Private-sector banks are likely to bear the brunt of the situation, as they are already operating at much higher Loan to Deposit Ratios, said S&P Global Ratings Credit Analyst Deepali V Seth Chhabria. "Adding to the stresses on the private-sector banks, the lenders are growing at a much faster pace than the public-sector banks."

Deposit competition could get fiercer than our base case assumes, if lenders don't pull back on credit growth, said Geeta Chugh, credit analyst at the ratings agency. Private banks' Loan Deposit Ratio could cross 97% by March 2026, in the alternate scenario of 18% credit growth. The hit to net interest margins for the system could double in this scenario, falling 20 basis points to 2.8%, and this could translate into a 10-15 basis point impact on the return on average assets, she explained.

A surge in credit growth has pushed Indian banks' ratio of loans to deposits to a two-decade high; growth beyond this level will either come more slowly or be more expensive, the report said.