Banking News

Resource constrains to restrict credit growth: Report


Funding conditions to play a crucial role in constraining loan growth for many banks in the country, according to S&P Global Ratings. 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, the ratings firm said and expects system-level credit growth to moderate to 14% in fiscal 2025 (ending March 31, 2025), from about 16% year-on-year growth in the first three quarters of fiscal 2024. But margins are also set to fall.

If credit and deposit growth rates remain steady, a period of deposit competition looms, squeezing bank margins to 2.9% from 3%, it said. “ Private-sector banks are likely to bear the brunt of the situation, as they are already operating at much higher LDRs,” 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.”

Indian banks’ credit deposit ratio reached a two-decade high of 80% in December 2023. While the credit growth is 1.5 times the nominal GDP, deposits are rising only in line with the nominal GDP.

Also savings are moving toward other avenues such as mutual funds, equity investments, and real estate. “All of this is leading to a deterioration in loan to deposit ratio (LDR) levels. “Although this compares favorably with most regional banking systems, India has a much higher regulatory reserve requirement.”

The country’s banks have to keep 4.5% of net deposit liabilities with the central bank as cash , and lenders have to hold a further 18% of these net liabilities in government securities. These regulatory requirements are more stringent than those placed on other banking systems in South and Southeast Asia, limiting the funds available for loan growth among Indian banks.

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