India’s systemic credit growth reached 13.8% as of March 15, driven by liquidity buffers and a consumption-led rebound following GST reductions, a report revealed. Banks have the opportunity to increase their credit-to-deposit (CD) ratios further, as deposit growth held steady at 10.8%, pushing the CD ratio to 83% due to accelerated credit expansion. The report anticipated term deposit rates to remain stable amid tough competition for deposits, impacting low-cost deposit accumulation.
Residual benefits from the cash reserve ratio cut and the RBI’s backing of the LCR-NSFR framework were identified as factors aiding the expansion of CD ratios, with public sector banks expected to gain more. The report forecasted systemic credit growth to maintain around 13.5% YoY in FY27E, coupled with a robust deposit growth of 11.5%. Net interest margins were predicted to remain steady, with mid-size banks in a favorable position for margin growth.
The report highlighted that the 25 bps repo rate cut in December 25 is likely to be fully reflected in lending yield transmission in Q4, keeping funding costs elevated as most banks refrained from reducing their TD/SA rates post the rate adjustment. Some major private banks may witness stagnant margins in their Q4 results. While asset quality was generally stable, concerns were raised about potential cash flow and input cost risks for MSMEs due to the Middle East conflict, posing a threat to this segment.
In terms of asset quality in private banks, the report emphasized the need for close monitoring of business loans and CVs amidst the Middle East tensions, although immediate impacts were deemed limited.
