Icra slashes credit growth for FY25, says slump to continue in next fiscal

MUMBAI: With the economy having lost steam in the first half, and the second half not seeming to offset the losses booked earlier, banks are set to face headwinds on the credit demand side. Another dampener is the steep slowdown in personal loans and loans to non-banks. This has led rating agency Icra to revise down its forecast for credit growth to 10.5-11% for FY25 from its earlier estimate of 11.6-12.5%. The agency also sees the slump continuing into the next fiscal with 9.7-10.3% growth.

Though Icra also sees a downward trend on the profitability side in these fiscals, since the return indicators are expected to remain comfortable, it has retained the stable outlook for the sector.

Revising downwards the credit growth estimate for FY25, Icra attributed this to banks’ focus on reducing their credit-to-deposit ratio and reducing their exposures to unsecured retail and non-banking financial companies. This rebalancing of the CD ratio will continue for some more time.

In FY26, credit growth may ease to 9.7-10.3% weighed down by the persisting high CD ratio and implementation of the proposed changes in the liquidity coverage ratio framework, it added.

According to Sachin Sachdeva, head of financial sector ratings at the agency, the persisting high interest rates and slowdown in credit growth, especially in the high-yielding advances segments like personal loans, will impact the margins of banks. And if there is an interest rate cut, that will further crimp margins. However, slower credit growth will help improve the loss-absorption cushions of banks.