Crisil predicts bank credit growth to dip to 14% in FY25

The banking sector's credit growth is projected to decline by 2 percentage points, settling at 14% for the fiscal year 2024-25, according to Crisil. This slowdown is attributed to a dip in GDP growth to 6.8% in FY25 from 7.6% in FY24, along with RBI's new measures such as increased risk weights on unsecured loans and the impact of a high base, Crisil says.

The rating agency highlighted that the fundamental drivers of credit demand remain strong, with an anticipated revival in private corporate capital expenditure in the latter half of FY25 expected to provide additional support. The corporate sector, which comprises 45% of total loans, is forecasted to maintain a growth rate of 13% in FY25. In contrast, retail growth is expected to decelerate to 16% from 17% in FY24.

Crisil also noted that slower deposit accumulation could constrain credit growth, despite the narrowing gap between deposit and credit growth over the past year.

Despite this slowdown, retail will continue to be the fastest-growing segment for banks, although it will be impacted by lower growth in unsecured consumer credit—25% of retail credit—as banks adjust to regulatory requirements imposing an additional 25 percentage points risk weight and enhance their underwriting processes to mitigate potential delinquencies.

Higher yields in unsecured consumer credit will help absorb the increased capital charge, thereby limiting the decline in retail growth, Crisil added.

On the corporate side, sectors such as steel, cement, and pharmaceuticals will spearhead the capex recovery. Emerging industries like electronics and semiconductors, electric vehicles (EVs), and solar modules are also expected to contribute to capital expenditure, particularly in the medium term.

The Micro, Small, and Medium Enterprises (MSME) segment, which accounts for 16% of overall credit, is projected to see its growth rate decrease to 15% in FY25 from 19% in FY24. Agricultural credit growth will remain tied to monsoon patterns but is expected to moderate following a strong fiscal 2024.

Crisil further reported that India's bank credit growth is anticipated to moderate to 14% in FY25, following an estimated robust growth of about 16% year-on-year in FY23 and FY24. The growth in FY25 will be tempered by high base effects, revisions in risk weights, and a somewhat slower GDP growth rate.

Strong economic activity and retail credit demand were key drivers of loan growth in FY24. Crisil emphasised that the fundamental drivers of credit demand are broadly intact, and a revival in private corporate capital expenditure in the second half of FY25 could provide additional momentum.

The agency also pointed out that the pace of deposit growth might limit credit growth, despite the differential between deposit and credit growth having decreased over the past year.

Deposit growth accelerated to 13% in FY24 from 10% in FY23, reducing the gap between deposit and credit growth to 3% from nearly 6% in FY23.

Within the credit mix, the corporate segment, with a 45% share in bank advances, is expected to grow steadily at 13% in FY25. The retail segment, holding a 28% share, is anticipated to grow by 16%. Growth in corporate credit will be bolstered by private sector industrial capex, supported by solid GDP growth expectations of 6.8% in FY25.

Ajit Velonie, senior director, Crisil Ratings, says, “Growth in corporate credit will be supported by private sector industrial capex in fiscal 2025, underpinned by expectations that GDP growth will remain solid at 6.8%, although lower than an estimated 7.6% in fiscal 2024.”

Retail credit growth is expected to slow slightly to 16% from 17% in FY24, influenced by lower growth in unsecured consumer credit as banks adjust their strategies in response to new regulatory requirements. The high-base effect, especially from the HDFC Ltd and HDFC Bank merger in FY24, will also impact retail growth. However, the higher yields in unsecured consumer credit will help mitigate the decline in retail growth.

Growth in the MSME segment, representing 16% of total credit, is forecasted to slow to 15% in FY25 from 19% in FY24. This segment will benefit from downstream capex revival, the central government's Atmanirbhar Bharat initiative, and the Productivity-Linked Incentive scheme, along with greater formalisation of the sector and improved digital public infrastructure. Agricultural credit growth will remain dependent on monsoon trends but is expected to moderate following a strong FY24.