Credit growth trajectory likely to slow down to 12-14% YoY over FY25-27, says Emkay Global

  • Private banks like HDFC Bank, ICICI Bank, Axis Bank, IndusInd Bank and IDFC First Bank are in a branch expansion mode and have identified their niche focus areas to mobilize retail deposits, but PSU Bank, except the likes of SBI and Bank of Baroda, still lag and could, thus, suffer in the long run.

Ankit Gohel
First Published22 Mar 2024
Credit growth trajectory is expected to slow down to 12-14% year-on-year (YoY) over FY25-27E from the current 16.5% YoY,
Credit growth trajectory is expected to slow down to 12-14% year-on-year (YoY) over FY25-27E from the current 16.5% YoY, (Image: Pixabay)

India’s banking sector is expected to face a slowdown in credit growth and with banks exhausting strategies to sustain margins, the imperative for mobilizing deposits emerges, analysts said.

The credit growth trajectory is expected to slow down to 12-14% year-on-year (YoY) over FY25-27E from the current 16.5% YoY, according to Emkay Global Financial Services. It also expects the loan-to-deposit ratio (LDR) to drop to 75% from a current high of 80%.

The overall deposit growth and more so slowing retail deposit growth could emerge as a structural risk to India’s long-term retail credit growth story unless it is addressed, the brokerage firm said in a report.

Also Read: EMI bounce rate improves to a five-year low indicating no material signs of risk build-up

It noted that some of the banks have reduced the excess cash on the balance sheet to fund credit growth in the recent period, thereby delaying deposit growth and protecting margins.

However, it believes most of these levers are now largely exhausted and, thus, banks will have to mobilize deposits to incrementally fund credit growth. 

Emkay Institutional Equities cited that banks’ preference for low-cost deposits is likely to remain high and, thus, accelerating deposit growth is imperative for banks to support credit growth in the long run.

Also Read: PSU Banks vs Private Banks: Here's what 5 experts have picked

“The extended elevated rate cycle and, thus, higher funding cost coupled with rising asset-quality risk in unsecured retail loans contributing 12% of YTD credit growth has raised concerns about profitable lending. The recent RBI’s actions to contain the bank’s undeterred growth in unsecured/NBFC loans has instilled fear amongst the lending institutions. Every bank will need to find its method for winning or at least surviving the retail deposit war,” said Anand Dama, Senior Analyst BFSI, Emkay Global Financial Services.

According to him, some of these solutions could include concentrating on the expanding branch network along with a focus on corporate salary, community banking, self-funding ratio, capturing corporate/SME customer flow via transaction banking/CMS and retail customer cash flow via wealth management, and so on.

The brokerage house noted that private sector banks such as HDFC Bank, ICICI Bank, Axis Bank, IndusInd Bank and IDFC First Bank are in a branch expansion mode and have identified their niche focus areas to mobilize retail deposits, but state-run lenders, except the likes of SBI and Bank of Baroda, still lag and could, thus, suffer in the long run.

Read here: Private banks poised for long-term victory over PSBs amid raging retail deposit war: Report

Seshadri Sen, Head of Research and Strategist, Emkay Global Financial Services believes the Indian banking sector is structurally in stronger shape to ride the retail credit growth story over the next decade, amid rising consumerism. 

“However, funding such growth via retail deposits at a reasonable cost among rising structural disruptions could emerge as the biggest challenge. PSU Banks may see near-term gain, but private lenders will be the winners in the long term amid the raging retail deposit war,” he said.

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HomeIndustryBankingCredit growth trajectory likely to slow down to 12-14% YoY over FY25-27, says Emkay Global

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