Tighter regulations on personal loans and project finance may hurt banks in FY25

economictimes.indiatimes.com:

banks, led by state-owned ones, had their best year in fiscal 2024 as growth remained robust and bad loans were at a decadal low, but the current fiscal could be more challenging amid a likely slowdown in credit growth, analysts said.

Regulatory changes in unsecured consumer loans as well as new provision norms on project finance and expected credit losses (ECL) as the regulator tightens norms to avoid accidents are expected to impact credit growth.

Net interest margins (NIMs) are also likely to remain under pressure because of higher deposit rates that will impact banking profit growth in the current fiscal, analysts said.

To be sure, credit rating agencies have already predicted a moderation in credit growth this year. Last month, ICRA revised its outlook for the banking sector to 'stable' from 'positive', pencilling in a credit growth of 11.6% to 12.5% in FY25, down from 16.3% in the fiscal ended March 2024.

Shivaji Thapliyal, research head at Yes Securities, said though credit costs could inch up and margins may have peaked already, there is nothing particularly damaging for return ratios expected on the horizon.

«The market is still not used to the eight-year-long NPL (nonperforming loan) cycle having come to an end,» he said. «Higher risk weights have been broadly absorbed with some relative slowdown in riskier lending. ECL provisions should also be broadly absorbed given they will be spread over five years.»

Thapliyal was referring to the so-called ECL provision model proposed by the Reserve Bank of