In an interaction with businessline, Karthik Srinivasan, Senior Vice-President and Head – Financial Sector Ratings, ICRA, shared his outlook for the banking sector. Excerpts:

With the RBI cutting its current year GDP growth forecast, how do you see the credit growth panning out?

The banking sector has been growing pretty sharply over the last two years. The challenges on high credit-deposit ratios were visible last year itself. From our perspective, we had pencilled a slower growth for FY25. Our initial estimate was about 11.5-12.5 per cent range, but given the performance year till date and the fact that the GDP growth estimates have also come down, we are all likely to further revise our credit growth expectations for FY25 possibly closer to 10.5-11 per cent. A large part of it is driven by slowdown in the retail and the services segments, which have been the key drivers for the banking system growth in the last two years.

How well capitalised are banks?

From a regulatory capital point of view, banks are pretty well capitalised. Last couple of years, their internal approvals have also been improving. At the current stage, they seem to be fairly comfortable.

We are expecting a slowdown in credit. We are not going to see that 18 per cent, 19 per cent, 20 per cent kind of growth that we saw in the last couple of years. With the expectation of a lower credit growth, we believe banks are fairly well capitalised for the next 12-24 months. The only thing that we would need to bear in mind is, a lot of public sector banks still have government shareholding of more than 75 per cent — regulatory requirement is to get the holding down to 75 per cent. SEBI has been giving them extensions. To that effect, you could see some capital raise.

Then there are some regulations which are still in draft stages. How they pan out would possibly again decide on the quantum of capital raise. Notwithstanding that, I guess the equity markets are still robust. So, you shouldn’t be surprised if a few banks are actually looking at a capital raise, given that the current market multiples are pretty good.

What is your outlook for credit and deposit growth for banks for FY26?

We are still working out our numbers. This year’s estimates of about 10.5-11 per cent for credit growth and possibly around 11 per cent on deposit growth is the number that we currently have for FY25. More or less, it would be in the similar range (for FY26).

We don’t see a situation where the numbers can significantly deviate from these levels. But a lot of things are at play. Probably, we need to wait and see what the Budget has in store for us.

Published on December 17, 2024