Slower Growth In FY25 To Dampen Bank Credit

A slower growth in India's economy in fiscal 2025 is likely to moderate loan disbursements in the Indian banking system, according to analysts.

A median of 53 economists polled by Bloomberg shows the GDP growth forecast at 6.4% in FY25, sharply lower than the Reserve Bank of India's estimate of 7%. This is 120 basis points slower than the 7.6% FY24 growth estimate, which the government has.

Economists have cited weakness in private consumption, uncertainty over external demand, and incomplete transmission of rate hikes as potential reasons. Moreover, the added push in credit offtake this year due to merger of Housing Development Finance Corp. with HDFC Bank Ltd. in July 2023, will fizzle out in FY25.

"There are risks as aggregate demand is largely driven by government capex," India Ratings & Research said in a report. "Prevailing consumption demand is still skewed in favour of the goods and services consumed by the households belonging to the upper 50% of the income bracket."

Yuvika Singhal, economist at QuantEco Research, expects the pent-up consumption demand in goods and services seen in post-Covid era to normalise in FY25, which may result in a moderation in bank credit to 14% going forward.

"The pace of moderation in credit could widen in FY25 because transmission of rate hikes is still not complete. That could impinge on urban leveraged consumption, and thereby credit growth in personal loans," Singhal told NDTV Profit.

This could be more pronounced in FY25, she said.

Interestingly, retail loan growth moderated to 18.4% in January, as against 20.7% a year ago, according to Reserve Bank of India's sectoral credit data.

Growth in bank credit to industry decelerated to 7.8% year-on-year in January, compared to 8.7% in the same month last year, according to the monthly data release.

Indranil Pan, chief economist at Yes Bank, also echoes the view. "I don't expect the momentum to slow very significantly, but at a margin, we should see some slowdown (in bank credit)," he said.

India Ratings estimates banking system credit growth of around 15% year-on-year for FY25, compared with 17% currently. S&P Global Ratings also expects system-level credit growth to moderate to 14% next fiscal. 

Madhavi Arora, lead economist of Emkay Global Financial Services lists out five major reasons for "a much slower, yet healthy FY25 growth of 6.5%".

The economic growth in the coming fiscal year will be led by cyclical headwinds, such as relatively slower net government spending, fading terms-of-trade gains from lower commodity prices, patchy agriculture performance, tighter lending standards, and relatively weaker exports, she said.

Simmering Flame On NBFCs Lending

Banks trimmed their exposure to NBFCs post November, with credit to non-bank lenders falling 1.1% from the previous month to Rs 15.03 lakh crore as on Jan. 26, the data showed.

"NBFCs maintain borrowing relationships with multiple banks simultaneously...Though the banks are well capitalised, they must constantly evaluate their exposure to NBFCs and the exposure of individual NBFCs to multiple banks," RBI Governor Shaktikanta Das had said in November.

Hence, NBFCs have resorted to alternate routes for funding, most commonly the debt market, according to lenders.

"NBFCs would resort to more of retail issuances of debentures, which lend granularity to funding and diversify the investor base," India Ratings said in its report on Thursday. "NBFCs have also started to grow their franchisee in an asset-light manner by getting into co-lending and business correspondent arrangements with other lenders."

Growth in banks' lending to NBFCs is likely to continue moderating going forward, analysts at Citi Research said in a note.

Moderation In Personal Loans Expected

Economists believe that a drawdown in private consumption expenditure may weigh on overall personal loans.

"Personal consumption expenditure was higher in Q3, possibly supported by personal loans. In Q4, we may see some amount weaning off in demand for personal loans," Pan said.

India Ratings said that a pick-up in demand for goods and services by lower income segments is necessary for sustained consumption demand growth.

Banks' unsecured personal loans portfolio grew 1.3% month-on-month in January to Rs 13.5 lakh crore, excluding the impact of HDFC-HDFC Bank merger, even as the RBI increased risk weights on such loans. Credit card loans, however, remained resilient. The segment grew 2.6% month-on-month to Rs 2.6 lakh crore in January.

Corporate Credit May Not Fare Well

Sectorally, in the corporate segment, Pan expects credit to infrastructure to taper off in the coming months as the country heads into election year.

"Bank credit was expected to slow down anyway because industrial demand is lagging," Pan said. "With commodity prices having come down, the demand for loans from the corporate sector may have also come down."

Slowdown in advanced economies, geopolitical fragmentation, and tighter monetary policy is expected to result in global export headwinds in FY25. "This is likely to be subdued credit demand from companies which are export-oriented," Singhal said.

The only silver lining that most economists are betting on is a pickup in private capex in FY25, which could propel bank credit in a meaningful way.