In this State of the Economy Year-End Podcast, businessline’s K Ram Kumar is joined by Karthik Srinivasan, Senior Vice President and Group Head of Financial Sector Ratings at ICRA, to discuss the current state of the Indian banking sector, its performance over the past year, and expectations for the upcoming financial year. 

Against the backdrop of a slowing economy and a revision in the RBI’s GDP growth forecast, the banking sector faces challenges, particularly with regard to credit growth and liquidity. 

“Credit growth expectations for FY25 are likely to be revised closer to 10.5% to 11% due to a deceleration in key segments like retail and services,” notes Karthik Srinivasan. He explains that a slowdown in these important sectors would likely temper overall credit growth in the coming year. 

However, Srinivasan adds that despite this moderation, banks are “pretty well capitalised” and should be able to meet credit demand over the next 12-24 months without the need for immediate capital raises. He also points out that public sector banks might still be required to raise capital due to government shareholding regulations. 

The discussion also touched on the impact of the RBI’s measures, such as increasing risk weights on unsecured consumer credit and bank credit to non-banking financial companies (NBFCs). “The credit growth to the NBFC sector has slowed quite significantly,” points out Srinivasan, with year-on-year growth dropping to just 6% in October 2023. He further highlights that while banks had been managing deposit rates to bridge the credit-deposit gap, “margins for banks and, for that matter, even NBFCs, are expected to shrink” in the coming months due to increased competition for deposits and pressure from lower lending rates. 

Looking ahead to FY25, Srinivasan indicates “this year’s estimates of about 10.5% to 11% on credit growth and possibly around 11% on deposits are likely to remain similar next year,” suggesting that the banking sector would experience moderate growth. He also acknowledges that “stress is building up” in certain sectors, particularly in retail and SME portfolios, but remains confident that the banking system is robust enough to absorb these challenges. 

Srinivasan concludes that the outlook for FY25 remains steady, with manageable risks, as banks are well-positioned to navigate potential headwinds. 

Listen in!

(Host: K Ram Kumar, Producer: Siddharth Mathew Cherian)

About the State of the Economy podcast

India’s economy has been hailed as a bright spot amid the general gloom that seems to have enveloped the rest of the world. But several sectors continue to stutter even as others seem set to fire on all cylinders.

Published on December 17, 2024