ICRA Revises Banking Sector Outlook to Stable from Positive

Mumbai: Ratings agency ICRA Ltd has revised the banking sector outlook to stable from positive as it expects credit growth and profitability metrics to moderate, though the same would continue to remain healthy.

The risks to the stable outlook include economic shocks, regulatory changes, higher interest rates, higher operating expenditures, and an expected credit loss (ECL) framework.

While the compression in the interest margins over the last 18 months has been driven by rising deposit costs, the expectations of a rate cut in H2 FY2025 could lead to margin pressure, driven by a likely downward repricing of advances. The challenges in mobilising deposits, high interest rates, and the increase in risk weights will slow down the pace of credit growth to 11.6-12.5 per cent in FY25 from 16.3 per cent in FY24.

The credit-to-deposit ratio (CD ratio) for the banks is estimated to have increased to 78 per cent (excluding the merger of HDFC Limited) as on March 22, 2024, the highest since December 21, 2018 (77.9 per cent) and much higher compared to 75.7 per cent as on March 24, 2023, and 71.9 per cent as on March 25, 2022. The CD ratio shows how much of the money banks have raised as deposits have been lent out.

Sachin Sachdeva, vice-president, and sector head at ICRA said, “With elevated CD ratio, the competition for deposit mobilisation is likely to remain high even during FY2025, which will limit the banks’ ability to cut their deposit and lending rates. Amid this, if the policy rates are cut, it will pose significant challenges to banks’ net interest margins (NIMs),” added Sachdeva.