Banks may have to decelerate loan growth in FY 25: S&P

S&P Global Ratings has indicated that Indian banks may need to ease off on their loan expansion in the fiscal year 2025, aligning it more closely with deposit growth trends. The assessment comes amidst a concerning trend where loan growth has outpaced deposit growth in most banks, leading to a deterioration in the loan-to-deposit ratio.

Speaking at a recent webinar, Nikita Anand, Director at S&P Global Ratings, emphasized the importance of banks adjusting their loan growth to match deposit growth to avoid potential strains on profitability. 

Anand highlighted that failure to do so could result in banks resorting to higher-cost wholesale funding, which would negatively impact their bottom line.

Currently, private sector banks are driving loan growth with rates around 17-18%, while public sector banks trail slightly with growth rates ranging from 12-14%. Anand noted that Indian banks can sustain loan growth rates of 15-20% over a three-year period without the need for additional capital infusion. 

However, the existing trend shows that loan growth is consistently 2-3 percentage points higher than deposit growth across the banking sector.

Anand stressed the importance of aligning loan growth with deposit growth, cautioning that failing to do so could force banks to seek wholesale funding at a higher cost, putting further pressure on margins and profitability. 

Despite the need for moderation in loan expansion, S&P expects Indian banks to maintain robust credit growth, profitability, and asset quality, reflecting the country’s strong economic performance.