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

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Mumbai: Indian 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 India (RBI), based on a discussion paper released last year whereby banks will have to increase provisions by 20% to 40%. The banking regulator has since constituted an external working group to study the framework before its implementation.Bankers have largely guided credit growth to be in line with what was achieved in fiscal 2024. For example, State Bank of India (SBI) chairman Dinesh Khara said he expects the bank’s credit growth to be in the 14% to 16% range in the current fiscal year, more or less similar to the 15% growth in loans seen in fiscal 2024.

SBI saw some pressure on its NIM last quarter with the ratio dropping to 3.47% from 3.84% a year earlier, but Khara said he expects the bank to maintain margins at current levels.

Siddhartha Khemka, head of research (retail) at Motilal Oswal Financial Services, said banks could turn cautious on some sectors, especially after regulatory action like the increase in risk weightages on unsecured loans, but there is no sign it will have any serious impact on banking profits. “In our banking universe, private sector bank loan growth is likely to moderate to 16% from 30% seen last year,” he said. “But the impact of the RBI norms will be felt more on smaller and niche lenders as the large ones have the capacity to absorb these changes.” Khemka expects the banking sector to continue to drive Nifty earnings in FY25.

Thapliyal of Yes Securities said the market would also be curious to know how banks would behave in light of the draft circular tightening provisions on project finance.

“One will have to see how banks solicit project finance business in light of this circular. One would also hope that the final version is less onerous than the draft norms,” he said.

In draft guidelines released on Friday, the RBI has asked all regulated entities to provide 5% of the loan amount when a project is in the construction phase, progressively reducing to 2.5% when a project is operational and further to 1% after the project has adequate cash flow to repay current obligations and its long-term debt declines by at least 20% from the time of commencing commercial operations.

The provisions are expected to be implemented in a phased manner, 2% in fiscal 2025, 3.5% in fiscal 2026 and 5% by 2027. It substantially increases provisions from the flat 0.4% standard assert provisions on project loans currently.

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