Bank credit is expected to grow at 12-13 per cent in FY25 led by the services and retail segments. However, this would be lower than the 15.4 per cent year-on-year growth registered in FY23 and 16.5 per cent as of December 1, 2023, according to ICRA Ratings.

“Incremental credit expansion has been robust so far, at Rs 15.5 lakh crore (for FY24 till December 1), against Rs 18.2 lakh crore in FY23. However, as we look beyond this year, tight liquidity conditions would eventually weigh down on growth,” said Aashay Choksey, Vice President, ICRA.

Weak demand for agriculture credit, subdued export demand as well as the recent increase in risk weights on unsecured consumer loans and non-banking financial companies (NBFCs) could also temper credit traction, he added.

Further, continued upward repricing of the deposit base in H2 FY24 is expected to further compress interest margins, it said, adding that expectations of a rate cut from August 2024 could set off a downward pressure on lending yields and, hence, pressure on interest margins may continue during FY25.

As a result, operating profitability levels are seen moderating slightly and stabilising at 1.8-2 per cent in FY24-25 compared to 2.2 per cent in FY23.

Asset quality

ICRA has maintained a ‘positive’ outlook on the banking sector, driven by comfortable asset quality levels, with both corporate and retail portfolios seen performing well in terms of delinquencies, resulting in limited net-NPA (non-performing assets) additions.

Gross-fresh NPA generation is expected to increase slightly in FY25 “as portfolios gradually season”, ICRA said, adding that corporate book asset quality, however, is expected to hold up and slippages are likely to remain granular. As a result, the headline metrics of the banking sector would continue to improve on steady recoverability and credit growth.

ICRA expects gross NPAs to decline to 2.1-2.5 per cent and net-NPAs to 0.5-0.6 per cent by March 2025. It pegs gross NPA at 2.8-3.1 per cent as of March 2024, down from 3 per cent a year ago, and net-NPA at 0.7 per cent at the end of FY24, also lower than the 1 per cent seen in the previous year.

“Accordingly, credit costs are estimated to remain benign at 0.7-0.8 per cent of advances in FY24-FY25, in line with FY23. This should allow banks to comfortably maintain their return on assets (RoAs) at 1.0-1.2 per cent in FY24-FY25 compared with 1.1 per cent in FY23,” the note said.

Growth capital

While return on equity (RoE) is projected to moderate, it is likely to remain healthy at 11.5-12.7 per cent in FY25, as against 13.7-14.6 per cent estimated in FY24 and 13.8 per cent in FY23, thus meeting a meaningful share of banks’ growth capital requirements.

“Capitalisation levels would remain comfortable with Tier-I capital of the banking sector at 14.5-14.9 per cent, as on March 2025, from 14.4-14.6 per cent, as of March 2024, and 14.4 per cent, as on March 2023, while improvement in solvency levels would flatten out to 4-6 per cent in FY24-25 (8 per cent as of March 2023),” it said.