Credit growth for banks to slow to 12 per cent in FY25: ICRA

While the FY25 figure includes the impact of merger of HDFC Limited and HDFC Bank, the FY24 number excludes the impact.

For the NBFCs, the growth in assets under management (AUMs) is expected to slow down sharply to 16-18 per cent in FY2025 from 25 per cent in FY2024.

The share of the retail segment and the NBFCs in the incremental credit flow of banks declined to 42.9 per cent in 12 months ending August 2024 from 48.9 per cent for the corresponding period of the previous year, driven by slower flow of credit to the NBFCs.

As a sizeable portion of bank credit flow to the NBFCs is towards on-lending to the retail segments, overall credit to the retail segment may slow down in the next 12-18 months.

The rating agency said while the demand for retail credit remains strong, the regulatory nudge to prevent overheating in certain segments in the retail space is the key factor driving slower growth.

In November last year, the RBI had raised risk weights on the exposure of banks towards consumer credit, credit card receivables and non-banking finance companies (NBFCs) by 25 per cent to up to 150 per cent. Risk weight refers to the capital banks keep aside as provisioning to cover any loan defaults.

“The regulatory measures to slow down bank credit growth will be crucial for banks to cut their deposit rates, once the rate cut cycle starts,” said Anil Gupta, Senior Vice President & Co-Group Head – Financial Sector Ratings, ICRA.

The rating agency said that the high credit growth during the last two years in the retail segment, across the lenders, has potentially resulted in over leveraging in some asset segments, and a slower credit growth can impair the refinancing ability of some of these borrowers, as the lenders become risk averse.

Such tightening often results in weaker borrowers falling behind in their repayments schedule, thereby increasing the asset quality pressure for the lenders.

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 said.