The year 2024 brings certain challenges for the Indian banking system. According to the global rating agency S&P, banks are facing a shortage of funds. This might cause slower loan approvals than expected. The agency highlighted that banks are lending out money faster than they’re receiving deposits. This shortage of funds could result in delays in loan processing, making it difficult for people to acquire loans in the upcoming year.
The rating agency announced that Indian banks are expected to see strong growth in credit, profitability, and asset quality this fiscal year. However, they may need to reduce their loan expansion because deposits are growing more slowly.
Nikita Anand, Director at SSEA, S&P Global Ratings, stated in the second-quarter banking update for the Asia-Pacific region that the agency anticipates a recovery in the area if deposit growth, especially in retail deposits, continues to be sluggish this fiscal year. Strong credit growth is expected to decrease from 16 per cent to 14 per cent.
Anand noted that the loan-to-deposit ratio has dropped in all banks, with loan growth surpassing deposit growth by two to three per cent. Speaking at a recent seminar held by S&P Global Ratings, Nikita Anand stated, “We expect banks to decrease their credit expansion this fiscal year to match deposit growth. Failing to do so could lead to increased costs for obtaining large funds, which would impact profits.”
Private sector banks have observed the most substantial loan growth, peaking at approximately 17-18 per cent. Conversely, credit expansion in public sector banks (PSBs) has hovered between 12-14 per cent. This suggests that private banks have issued a greater volume of loans. Due to fewer deposits, such as Fixed Deposits (FDs), their ability to distribute loans may decrease.
Banking experts are advising that people are opting for other investment choices with better interest rates, causing a decrease in traditional options such as banks. To attract customers, banks will likely need to increase the interest rates on Fixed Deposits (FDs) to encourage more deposits and enable loan approvals. However, pursuing this approach could potentially affect their overall profits.
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