Credit growth to the services sector accounting for 27.7% of total bank credit, has moderated to 13.0% in November 2024 compared with an increase of 25.7% in November 2023, driven by deceleration in credit growth for NBFCs at 7.8%, other services 17.8%, commercial real estate 14.3% and wholesale trade (other than food procurement) 15.8%, while credit growth has also eased for retail trade to 13.1%, transport operators 14.6%, aviation 16.9%, tourism, hotels and restaurants 3.9% and professional services 19.4%. However, the services credit growth for shipping accelerated for 11.9% and computer software moved up 22.5% in November 2024.

Personal loans accounting for 32.8% of total bank credit, increased at decelerated pace of 13.3% in November 2024 as against an increase of 30.0% in November 2023. Among the major segments of personal loans, the credit for housing increased at slower pace of 12.2%, other personal loans 11.6%, vehicle loans 10.3%, credit card outstanding 18.1%, education 17.5%, advances against fixed deposits 15.2%, and consumer durables 4.8%. However, the credit growth has improved for loans against gold jewellery to 66.1%, and advances to individuals against share, bonds, etc 6.4% in November 2024 from November 2023.

Priority sector loans accounting for 42.7% of total bank credit, increased at a slower pace of 11.9% in November 2024 compared with a 17.7% growth in November 2023. Among priority sector loans, the credit growth for micro & small enterprises eased to 11.7% and housing 1.6%, while credit to agriculture & allied activities also moderated to 12.9% and weaker sections 13.3%.

Credit to the industrial sector accounting for 21.8% of the total banking sector credit increased 8.0% in November 2024 compared with a rise of 6.1% in November 2023.

As per industry-wise classification, the segments showing negative credit growth were gems & jewellery (-2.8% from 18.2%). However, the credit growth has moderated for textiles (5.4% from 15.2%, infrastructure (1.6% from 2.3%), cement & cement products (1.0% from 15.1%), vehicles, parts & transport equipment (4.5% from 10.5%) and basic metal & metal product (15.8% from 19.0%. The credit growth has also eased for beverage & tobacco (11.0% from 33.6%), glass & glassware (13.9% from 36.3%), wood & wood products (13.8% from 20.5%) and leather & leather products (4.0% from 4.1%).

On the other hand, the credit growth has accelerated for other industries (23.3% from -5.2%), petroleum, coal & nuclear fuels (8.1% from -10.0%), all engineering (18.3% from 9.6%), chemicals & chemical products (11.4% from 5.8%) and construction (10.7% from 5.7%). Further, the credit growth has improved for rubber, plastic & their products (12.0% from 6.8%), paper & paper products (12.8% from 6.5%), food processing (12.1% from 11.6%) and mining & quarrying (incl. coal) (0.6% from -1.2%), end November 2024 over November 2023.

Aggregate deposits growth of the scheduled banks improved on sequential basis to 11.5% YoY at Rs 22067718 crore as on 13 December 2024, compared with 10.7% growth a fortnight ago and dipped from 13.3% rise a year ago. The time deposits of the banks moved up 11.4% at Rs 19464009 crore, while the demand deposits increased 12.3% to Rs 2603709 crore as on 13 December 2024.

The banks investment in government and other approved securities that qualify for treatment of statutory liquidity ratio increased 10.0% YoY to Rs 6556353 crore as on 13 December 2024, showing acceleration in growth from 8.4% increase a fortnight ago. The banks investment had moved up 17.6% in December 2023. The investment-deposit ratio was steady on sequential basis to 29.7% as on 13 December 2024 from 29.7% a fortnight ago, while eased from 29.8% in December 2023 with the faster growth in deposits. The investment-deposit ratio is much higher above the Statutory Liquidity Ratio of 18.0%.

Sector expectations

Encouraging deposit inflows: The banking sector has been facing challenges on deposits mobilization front leading to increase in credit-deposit ratio. The steps are expected to improve deposit inflows in to the banking sector.

Tax rationalization on saving account and term deposits: The threshold for saving deposit interest income may be raised to Rs 20000 from Rs 10000. This would provide stability in core deposit base, financial stability, better visibility of system liquidity with growing digital payments. Additionally, a flat tax is likely to be imposed on interest income from term deposits as against income tax charged as per the income buckets.

Incentivizing credit flow: There is need to improve credit flow to MSMEs, agriculture, and infrastructure sectors and steps such as interest subvention schemes and expanded credit guarantees are expected to be announced. There is also need for arranging supply of long-term funds for the manufacturing sector. There is need for increase in fund allocation to government-backed institutions like SIDBI, NABARD, NHB etc. the government may increase budgetary allocation to expand the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and incentivize banks to cover more MSME loans under this scheme.

Future reforms: The Budget may signal future changes for stability in the financial regulatory regime and the development of the stressed assets market. The budget may provide progress on reforms relating to the ECL Framework. There may steps to reduce regulatory differentiation between banks and NBFCs. In case of IBC, the norms for speedy resolution and increasing recoveries could be enhanced

Affordable housing finance: The budget may Increase allocation for the Pradhan Mantri Awas Yojana (PMAY). The PMAY-CLSS scheme may be extended along with a revision of price cap for affordable housing.

Microfinance: The microfinance sector is witnessing severe asset quality stress. The lenders are utlising the insurance cover for their lending through a government-backed credit guarantee framework. The sector may require the support in terms of dedicated funding window to address funding challenges, especially.

PSBs capital infusion: The banking sector does not have major expectation on infusion of any capital infusion from the government in Interim Union Budget 2025-26. The public sector banks have started to raise capital on their own. The public sector bank has improved financial health on the back of reduction in bad loans. The government may announce further measures to facilitate banks to raise capital from market.

Consolidation of public sector banks: The budget may provide more information on progress of consolidation of public sector banks and a roadmap to reduce the government’s stake in public-sector banks. This would help improve the efficiency of public sector banks.

Affordable housing finance: Increase in allocation for the Pradhan Mantri Awas Yojana (PMAY) and extension of PMAY-CLSS scheme along with a revision of price cap for affordable housing.

Infra Financing: Government may introduce alternate sources of funding to Infrastructure Projects, which are generally cheaper than loan markets for better rated borrowers like Tax Free Bonds, Tax Paid Bonds, etc.

Fiscal consolidation: The fiscal deficit has increased in the recent year in the backdrop of pandemic. The focus would be on fiscal consolidation for 2025-26 and any fiscal slippage may cause rise in bond yields leading to increase in borrowing costs. This would also lead banks to incur mark-to-market losses on investment book. The government control on fiscal deficit would help to keep interest rate rise in check.

Key stocks to watch

State Bank of India, Bank of Baroda, Punjab National Bank, ICICI Bank, Axis Bank, HDFC Bank, Federal Bank

Outlook

The banking industry is considered the backbone of any economy. The banking sector continued to report strong earnings performance supported by a strong asset quality, lower provisions and stable opex ratio. However, the banking sector is facing significant pressure on liquidity conditions causing decline in margins and moderation in NII growth. the slow deposits growth is major constraint for loan growth, which has also exhibited moderation over a year ago level driven by slowdown in the credit growth for retail and unsecured credit segments. The banking sector would watch for incentives for digitalization, measure to boost liquidity, incentivizing deposits flows to banking sector, roadmap on reduction of government stake in public sector banks and fiscal consolidation in the upcoming Interim Union Budget 2025-26.