Indian Banks Expect Challenging Year Ahead Despite Strong Performance in Fiscal 2024

Indian banks, particularly state-owned ones, celebrated their best fiscal year in 2024 with robust growth and historically low bad loans. However, analysts predict a tougher road ahead in the current fiscal due to potential credit growth slowdown and regulatory changes impacting lending norms.

Analysts warn that regulatory alterations in unsecured consumer loans and new provision norms on project finance and expected credit losses (ECL) could hinder credit growth. Net interest margins (NIMs) are also expected to face pressure due to higher deposit rates, impacting banking profit growth this fiscal.

Credit rating agencies like ICRA have already revised their outlook, foreseeing a moderation in credit growth this year. ICRA predicts a credit growth of 11.6% to 12.5% in FY25, down from 16.3% in the previous fiscal.

Shivaji Thapliyal, research head at Yes Securities, believes credit costs may rise, and margins might have peaked, but return ratios are expected to remain stable.

State Bank of India (SBI) chairman Dinesh Khara anticipates credit growth to range between 14% to 16% this fiscal, similar to the growth witnessed in fiscal 2024.

While some pressure on NIMs was observed last quarter, Khara remains optimistic about maintaining margins.

Siddhartha Khemka, head of research (retail) at Motilal Oswal Financial Services, suggests that banks may become cautious, especially after regulatory actions. Private sector banks could see loan growth moderate, but larger banks are better positioned to absorb regulatory changes compared to smaller lenders.

Despite these challenges, the banking sector is expected to continue driving Nifty earnings in FY25, according to Khemka.

In summary, while Indian banks enjoyed a successful fiscal 2024, the current year presents new challenges driven by regulatory shifts and potential credit growth slowdown. Banks are preparing for a more cautious approach amid evolving market conditions and regulatory frameworks.