New Delhi [India], January 2 : Credit rating agency ICRA has lowered its banking credit growth estimate for FY2025 to 10.5-11.0 per cent, down from its previous forecast of 11.6-12.5 per cent.
The revised outlook comes as banks shift focus toward reducing their credit-to-deposit (CD) ratio and curbing exposure to unsecured retail and non-banking financial companies (NBFCs), resulting in moderated credit growth.
For FY2026, ICRA anticipates a further slowdown in credit growth, estimating a range of 9.7-10.3 per cent, influenced by the high CD ratio and upcoming changes in the liquidity coverage ratio (LCR) framework.
Sachin Sachdeva, Vice President & Sector Head - Financial Sector Ratings at ICRA, said, "The persisting high interest rates and the slowdown in credit growth (especially towards high-yielding advances) would impact the margins of the banking sector. In addition, the rate transmission on yields is estimated to be faster as and when the rate cut cycle begins, which would further compress the margins."
He added, "Nevertheless, the return indicators are likely to remain healthy with return on assets (RoA) estimated at 1.1-1.2 per cent for FY2026 and at 1.2-1.3 per cent for FY2025 compared to 1.3 per cent in FY2024. With slower credit growth, this is likely to improve the loss-absorption cushions for banks, while remaining sufficient to meet the growth requirements."
Despite challenges in raising deposits, the capital ratios of most banks remain robust, and no significant capital requirements are expected for FY2026.
However, challenges in deposit mobilization and an increase in bond issuances are likely to continue. ICRA estimates bond issuances will reach Rs 1.3 trillion for FY2025.
On asset quality, ICRA noted that the overall net additions to the non-performing assets (NPAs) remain low, contributing to steady improvement in asset quality.
However, the retail sector is experiencing increasing stress, and fresh slippages are expected to rise in FY2025 and FY2026. The gross NPA ratio is likely to edge upward in FY2026 but is still projected to remain manageable.
Despite the anticipated rise in fresh NPAs, credit costs are expected to remain mild due to a lower legacy of net NPAs and a high provision coverage ratio, which gives banks flexibility to manage their bottom lines.
Credit costs are estimated to account for 21-23 per cent of the banking system's operating profit in FY2025 and 27-30 per cent in FY2026, compared to around 21 per cent in FY2024.
"Though fresh NPA generation rate is expected to see a relative increase in FY2025 and FY2026, the credit costs would see only a mild rise because of lower legacy net NPAs. Moreover, with the existing high provision coverage ratio (PCR), banks would have room to take lower incremental provisioning to manage the bottom line." Sachdeva added.
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