With system-level credit growth expected to continue to outpace deposit growth in FY24, lagging deposit accretion could constrain banks’ ability to give loans even as deposit rates are seen continuing to rise, according to India Ratings.

Against the 250 bps increase in the repo rate since May 2022, deposit rates have increased by 150-200 bp, implying that transmission will continue in the near term. Further, banks continue to offer higher rates on 1-3-year deposits reflecting short-term asset-liability management requirements.

The ratings agency, in a meeting to discuss the FY24 outlook for the banking and financial services sector, said it expects deposit growth for FY24 to be at 9-11 per cent and credit growth at 13.5 per cent lower than 15 per cent in FY23.


“The banking sector’s challenges include mobilizing deposits while minimizing the impact on margins, and provisions that could emerge in the near-medium term on account of the expected transition to the Expected Credit Loss (ECL) regime for provisions,” it said, while maintaining a ‘neutral’ outlook on the banking sector.

On the other hand, financial metrics are likely to continue to improve backed by strengthened balance sheets, encouraging credit demand and flattening expectations of market interest rates “leading to, among other things, normalization of profitability from treasury operations”.

Gross NPA ratio for the banking sector is seen at 3.3 per cent and the net NPA ratio at 1 per cent for FY24, while provision coverage ratio is expected to remain at the current level of 75 per cent.

NBFC margins under pressure

With respect to the NBFC sector, India Ratings expects margins to remain under pressure in FY24 owing to elevated borrowing cost and limited flexibility in passing over rate hikes given high competition.

“NBFCs have migrated to bank funding amid the hardening of yields in the capital markets. However, now that marginal cost of funds-based lending rate has also moved up, NBFCs have started mobilizing funds from capital markets,” it said.

AUM for NBFCs is expected to increase by 15-16 per cent in FY24, with balance sheet expansion largely seen supported by internal capital accretion, thus keeping leverage levels low.

Further, benign credit cost, given expectations of stable asset quality going ahead, should support NBFCs’ balance sheets. It pegged stage 3 assets ratio to be at 3.7 per cent in FY24.

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