Bank credit growth to stay healthy, but slip 200 bps to ~14%

Retail segment to grow fastest, corporate to hold steady, MSME to slow on a high base

Bank credit growth is expected to moderate ~200 basis points (bps) to ~14% this fiscal after an estimated robust growth of ~16%1 in fiscal 2024 (see chart 1 in annexure).

Strong economic activity and retail credit demand drove loan growth last fiscal. This fiscal, growth will be tempered by a high base effect, a revision in risk weights and a somewhat lower gross domestic product (GDP) growth.

The fundamental drivers of credit demand are broadly intact and a revival in private corporate capital expenditure (capex), especially towards the second half of fiscal 2025, can provide tailwind.

On the other hand, the pace of deposit growth can keep a check on credit growth, even though the differential between the two has reduced over the past year.

Within the expected overall bank credit growth of ~14% in fiscal 2025, the largest segment, corporate credit (~45% of bank credit) should see growth remaining steady at ~13%, while retail (~28% of bank credit), the second-largest segment, is expected to grow the fastest at ~16% (see chart 2 in annexure).

Says Ajit Velonie, Senior Director, CRISIL Ratings, “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. Steel, cement and pharmaceuticals will lead the capex recovery. Emerging sectors such as electronics and semi-conductors, electric vehicles (EVs) and solar modules will also contribute to capex, especially over the medium term2. The pick-up in capex should offset the impact of lower growth in bank funding to non-banking financial companies (NBFCs) – key growth driver within corporate credit earlier – on account of the 25 percentage points higher risk weight on lending to higher-rated NBFCs.

Retail credit will print a tad lower at ~16%, compared with ~17% in fiscal 2024, but will remain the fastest-growing segment for banks. Retail will feel the drag of lower growth in unsecured consumer credit (~25% of retail credit3) as banks realign their strategies following the regulatory stipulation of additional 25 percentage points risk weight and strengthen their underwriting processes to counter a potential rise in delinquencies.

The high-base effect, especially with the merger of HDFC Ltd with HDFC Bank in fiscal 2024 will also have a bearing on retail growth.

Nevertheless, the relatively higher yields in unsecured consumer credit and, hence, the ability to absorb the higher capital charge, will limit the decline in retail growth. Further, home loans remain the largest constituent of retail credit and should grow steadily, given increasing preference for home ownership and better affordability.

Growth in the MSME4 segment (~16% of overall credit) is estimated at ~15% this fiscal, off a higher base, having expanded a robust ~19% in fiscal 2024. This segment will be supported by a revival in downstream capex, the role of MSMEs in the central government’s Atmanirbhar Bharat initiative, and benefits accrued from the Productivity-Linked Incentive scheme. Also, with greater formalisation of the sector, including improving digital public infrastructure, the addressable base for banks has been expanding continuously.

Agricultural credit growth will remain linked to monsoon trends but should witness a moderation on the back of a strong fiscal 2024.

While the demand drivers remain intact, the pace of deposit growth can temper credit growth despite the gap between the two halving to ~300 bps from ~600 bps in fiscal 2023 (see chart 3 in annexure).

Says Subha Sri Narayanan, Director, CRISIL Ratings, “Banks have been managing their funding requirement through other avenues, such as dipping into their excess statutory liquidity ratio (SLR) holdings. However, the excess SLR held by banks has declined by over 250 bps on average over the last two fiscals, and the reduced flexibility there makes deposit growth even more critical. While there are intermittent signs of some easing in systemic liquidity, sustainability is to be seen and competition for deposits will likely keep deposit rates elevated. Banks will, therefore, need to balance their growth aspirations and protect margins, depending on their ability to mobilise cost-effective deposits.

CRISIL Ratings’ base case estimates on credit growth and, specifically, corporate credit growth, are sensitive to the final prudential regulatory framework that will be applicable to financing of project loans. Currently, the draft framework has been published for stakeholder comments. The impact on credit growth of any increase in provisioning levels for project loans is not factored in as of now as the final contours of the framework and effective date of implementation are yet to be published.

1 All growth estimates for fiscal 2024 exclude the impact of the merger of HDFC Ltd with HDFC Bank in fiscal 2024. Growth estimates for fiscal 2025 factor in the impact of the merger in the March 2024 loan book.
2 Please refer to the CRISIL Limited report, ‘Growth Marathon’
3 Excluding the impact of the merger
4 Micro small and medium enterprises