Ratings agency Icra anticipates a steady slowdown in credit growth for banks and non-bank financial companies (NBFCs) on account of regulatory measures and tighter funding conditions in the domestic markets.
The agency estimates the incremental bank credit growth to slow down to Rs 19-20.5 lakh crore in 2024-25, around 12 per cent Year-on-Year (YoY) growth, compared to Rs 22.3 lakh crore, or 16.3 per cent rise, in the previous fiscal.
For the NBFCs, Icra said the growth in assets under management (AUMs) is expected to slow down sharply to 16-18 per cent in the current financial year from 25 per cent in 2023-24.
The recent regulatory actions on certain entities are expected to push others to adjust their business practices and models, which shall also have a bearing on near-term growth, it said.
Once the rate cut cycle starts, "the regulatory measures to slow down bank credit growth will be crucial for banks to cut their deposit rates...This will especially be important for maintaining the margins, as the cut in policy rates expected in H1 CY2025 will exert downward pressure on lending rates," Anil Gupta, Senior Vice President & Co-Group Head - Financial Sector Ratings at Icra, said.
However, the proposed changes in guidelines for liquidity coverage ratio could mean the immediate cut in deposit rates, resulting in delayed transmission of rate cuts, Gupta added.
During the last two years, the high credit growth in the retail segment has potentially resulted in overleveraging and slower credit growth, impairing the refinancing ability of some of these borrowers.
Such tightening often results in weaker borrowers falling behind in their repayment schedule, thereby increasing the asset quality pressure for the lenders, the rating agency said.
"As bank funds constitute a larger share in the overall funding of NBFCs, a slower credit flow from banks to the NBFCs will also compress their AUM growth. The NBFCs in unsecured and digital lending businesses shall face a higher squeeze in funding compared to others," said A M Karthik, Senior Vice President and Co-Group Head - Financial Sector Ratings at Icra.
The agency further said that loan segments, which have high lending rates or marginal borrower profiles, like microfinance, personal loans, credit cards or unsecured business loans, are already showing a rise in delinquencies.
It expects these segments, which are largely unsecured, to continue to be a source of stress in the near term.
