Icra Projects Slower Credit Growth for Banks to 12 Percent in FY25 Amid Tightening Regulations

Icra Projects Slower Credit Growth for Banks to 12 Percent in FY25 Amid Tightening Regulations

Credit growth for Indian banks and non-bank financial companies (NBFCs) is expected to decelerate to 12 percent for the financial year 2024-25, according to ratings agency Icra. The agency’s report forecasts incremental bank credit growth in FY25 to slow to approximately ₹19-20.5 lakh crore, compared to the ₹22.3 lakh crore, or 16.3 percent growth, achieved in the previous fiscal. Icra attributes this moderation to the regulatory tightening measures and a less favorable funding environment in domestic markets.

Icra’s Senior Vice President & Co-Group Head of Financial Sector Ratings, Anil Gupta, emphasized the impact of upcoming regulatory steps. "Regulatory measures to slow down bank credit growth will play a pivotal role, particularly once the rate-cut cycle begins. These measures will allow banks to manage their deposit rates more effectively, preserving margins," Gupta noted. He added that the expected reduction in policy rates, anticipated in the first half of 2025, will exert downward pressure on lending rates, underscoring the importance of regulatory support to help banks adjust deposit rates accordingly.

Potential Impact of Liquidity Coverage Ratio Adjustments

Anticipated changes in liquidity coverage ratio (LCR) guidelines could further influence the banks' credit dynamics. Over the past two years, robust credit expansion in the retail sector has increased the risk of over-leveraging, impacting refinancing capabilities for some borrowers and prompting a shift towards tighter regulatory oversight. Icra warned that a reduction in bank credit flow to NBFCs may slow asset under management (AUM) growth for NBFCs, particularly those involved in unsecured and digital lending. According to A M Karthik, Icra’s Senior Vice President and Co-Group Head of Financial Sector Ratings, “NBFCs focused on unsecured segments, such as digital lending, will face more pronounced funding challenges."

Rising Delinquencies in Unsecured Lending

The agency also highlighted emerging risks in high-interest loan segments, such as microfinance, personal loans, and credit cards. Icra’s report indicates that these sectors, largely unsecured, are already showing an increase in delinquencies and are expected to continue as pressure points for lenders in the near term.

The anticipated tightening of credit conditions is expected to have broad implications, especially for borrowers within these unsecured categories, with weaker profiles struggling to meet repayment schedules, which could potentially escalate asset quality concerns for lenders.