ICRA has revised its credit growth estimate downwards to 10.5-11% for the current financial year from the earlier 11.6-12.5%. In its recent report, the credit rating agency said that with the banks focusing on reducing their credit-to-deposit (CD) ratio and reducing their exposure to unsecured retail and non-banking financial companies (NBFCs), the overall credit growth has moderated in the past few months. Consequently, credit and deposit growth has almost aligned with each other, and ICRA expects this trend to continue. Credit growth for FY26 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 (LCR) framework.
“The persisting high interest rates and the slowdown in credit growth 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,” said Sachin Sachdeva, vice-president & sector head – financial sector ratings, ICRA. “Nevertheless, the return indicators are likely to remain healthy with return on assets (RoA) estimated at 1.1-1.2% for FY26 and at 1.2-1.3% for FY25 compared to 1.3% in FY24,” he said.
With slower credit growth, this is likely to improve the loss-absorption cushions for banks, while remaining sufficient to meet the growth requirements, he added.
The capital ratios of several banks remain comfortable, and no major growth-related capital requirement is expected for FY26. Nevertheless, the implementation of the expected credit loss (ECL) framework and increased provisioning for project finance in the medium term is likely to be monitorable.
Raising deposits remains a challenging and costly proposition with the growth in deposits being driven by the expanding term deposits. At the same time, the certificates of deposit outstanding stood at its decadal peak at Rs 4.9 lakh crore as on November 29, 2024, higher than the earlier peak of Rs 4.5 lakh crore in April 2011. Despite the increase, these remain lower at 2.5% of total deposits, compared to the peak of 8% of total deposits in the past.