In FY24, the key challenges for Indian banking will be to mobilize required deposits without compromising on margins and the heightened provisions as the system shifts to a new model of loan provisioning, PTI reported, quoting ICRA.
The rating agency maintained its neutral outlook on the banking sector for the upcoming fiscal year, stating that key financial metrics are likely to improve further in FY24 on the back of stronger balance sheets, higher credit demand, and stability in interest rates.
ICRA estimated the deposit growth to come in at a low of 9–11% in FY24. Credit growth, which stood at 18.8% as of December 2022, will continue to race ahead of deposit growth, which lagged at 11.8% in the same quarter. This will lead to an increase in deposit rates. it said.
Deposit repricing will continue in a "competitive environment," according to ICRA, noting that banks have drawn on nearly ₹5 lakh crore of liquidity since March 2022, allowing for reasonably priced and evenly paced deposit mobilisation.
As banks grow their books at higher rates than seen in the preceding five to seven years, some of the improvements in low-cost deposits could reverse, especially for public sector banks (PSBs), it said.
Transmission of the RBI's rate hikes is playing out in both the lending and deposit rates, which are up by 2%. Banks are also resorting to using wholesale deposits, including bulk deposits, opportunistically to meet the demand for lending, the agency noted.
According to a report, the draft framework for banks' ECL (expected credit loss) has the potential to bring significant changes in loan pricing and credit dissemination. The report highlights that this framework could impact segments that have not demonstrated strong performance historically.
However, it also suggests that the impact on the capital buffers of lenders would be manageable. The report adds that banks may try to pass on the additional provisioning costs to end-borrowers through pricing.
The impact on banks would be asymmetric on account of varying inputs to the ECL model, portfolio concentrations and focus, product mix, take on macroeconomic expectations, and many other factors, it said.
The lenders can also face operational challenges in terms of making data with relevant history available in the shape and form required for the ECL models.
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