Indian banks’ capacity to finance private investments may be constrained due to the reduced scope for tapping into domestic savings, said S&P Global Ratings on Wednesday, noting that customers are turning to alternatives such as mutual funds, equities, and real estate.
Banks are likely to rely more on wholesale domestic and international debt for funding as deposits come under pressure, the rating agency said in a statement.
“A sharp credit revival though we don’t expect one in the next two years would stretch banks’ funding profiles and force them to rely on alternative funding sources. Cuts to the cash reserve ratio offer relief.” While banks’ loan-to-deposit ratios are competitive regionally, India’s reserve requirements exceed those of many peers.
CRISIL Rating, a unit of S&P, last week said a decline in households’ contribution to term deposits and low-cost current account and savings accounts could impact stability and impact banks’ funding costs for the medium to long term. Retail depositors are migrating to alternative investment avenues.
The share of households in outstanding bank deposits contracted from 64 per cent in FY20 to 60 per cent in FY25, with non-financial corporations filling the gap with a 4 per cent increase, CRISIL said.
Despite global uncertainty and cautious lending, credit is expected to grow at 11.5-12.5 per cent over FY26 to FY27. Banks’ credit offtake will revive from the second half of FY26 on the back of cuts in goods and services tax rates, Income Tax relief, and potential regulatory easing.
About banks’ asset quality risks, S&P said the financial resilience of Indian companies is improving. “Our scenario analysis suggests that Indian banks can easily absorb potential slippages, making them primed for growth,” said Geeta Chugh, credit analyst at S&P Global Ratings.
The new nonperforming loan (NPL) formation in corporate lending will average 1.1 per cent annually over the next two years. However, the overall rate of new NPL formation is projected to be higher, at 1.7-1.8 per cent, because of more slippages in the small and midsize enterprise and retail segments, said S&P.