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According to Emkay Institutional Equities, part of Global Financial Services the credit growth trajectory is expected to slow down to 12-14% YoY over FY25-27E from the current ~16.5% YoY (21% incl-HDFC) and so also LDR to 75% from a current high of 80%.  The overall deposit growth and more so slowing retail deposit growth (including SA) could emerge as a structural risk to India’s long term retail credit growth story, unless it is addressed.

Overall credit growth to moderate amid regulatory action on unsecured loans and rising asset-quality risk, thereby easing concerns on higher LDR

Some of the banks have reduced the excess cash on the balance sheet to fund credit growth in the recent period, thereby delaying deposit growth and protecting margins. However, most of these levers are now largely exhausted and, thus, banks will have to mobilize deposits to incrementally fund credit growth. Emkay Institutional Equities cited that believe banks’ preference for low-cost deposits is likely to remain high and, thus, accelerating deposit growth is imperative for banks to support credit growth in the long run.    

Anand Dama, Senior Analyst BFSI, Emkay Global Financial Services said “The extended elevated rate cycle and, thus, higher funding cost coupled with rising asset-quality risk in unsecured retail loans contributing 12% of YTD credit growth has raised concerns about profitable lending. The recent RBI’s actions to contain the bank’s undeterred growth in unsecured/NBFC loans has instilled fear amongst the lending institutions. Every bank will need to find its method for winning or at least surviving the retail deposit war.”

He further added, “Some of these solutions could include concentrating on the expanding branch network (metro + SURU with a focus on the Hindi Heartland, given its strong growth potential) along with a focus on corporate salary, community banking, self-funding ratio, capturing corporate/SME customer flow via transaction banking/CMS and retail customer cash flow via wealth management and so on.”

According to Emkay Institutional Equities, PVBs (HDFCB, ICICIB, Axis, IIB, and IDFCB) are in a branch expansion mode and have identified their niche focus areas to mobilize retail deposits, but PSBs (except the likes of SBI and BOB) still lag and could, thus, suffer in the long run.

Seshadri Sen, Head of Research and Strategist, Emkay Global Financial Services said “The Indian banking sector is structurally in stronger shape to ride the retail credit growth story over the next decade, amid rising consumerism. However, funding such growth via retail deposits at a reasonable cost among rising structural disruptions could emerge as the biggest challenge. PSBs may see near-term gain, but PVBs will be the winners in the long term amid the raging retail deposit war.

Money supply has slowed down over the past decade, but expected to improve

Broader Money Supply (M3) growth and deposit growth in the Indian banking system have settled at a lower level (<15%) over the past decade and even slipped below 10% for a few years, leading to current liquidity tightness. This is attributed to due to prolonged sluggish credit growth to the commercial sector (since FY14) and lower net forex asset growth for the banking sector.

Emkay Institutional Equities expects the lagged impact of healthy credit growth over the past two years coupled with higher interest rates offered by banks should gradually reflect via some improvement in M3 and deposit growth in the near-medium term, and long-term money supply growth will be conditioned to sustained strong credit growth and easing monetary policy by the RBI (including CRR cut)

Prep for an all-out war on retail deposits to fund the rising share of retail credit in the long run

PSBs have hit the purple patch, given their decent LDR/LCR, as they have been prudent in this cycle – sacrificing growth for profitability, improving corporate asset quality, stable & better management profile, and ability to raise growth capital without diluting the BV much. Additionally, higher share of the MCLR book would ease the margin contraction trajectory once the rate reversal cycle begins, which coupled with healthy treasury gains should lead to better profitability. However, slower branch expansion in the past few years due to asset-quality issues and merger pangs could once again accelerate the deposit market share fall and, thus, the economics of lending in the long run for PSBs, as they too will increase reliance on retail loans for growth. For PVBs, Emkay Institutional Equities believes the credit growth slowdown could be more pronounced in the near term, given rising retail asset-quality risk and higher LDR/lower LCR. However, PVBs (except KMB) are going the whole hog to accelerate retail branch franchisee (including the BC model + partnerships) from a long-term perspective, though it might slightly hurt near-term profitability due to higher opex.

Digital is a must, but branches remain the ‘soul’ to retail deposit mobilization

The rising digital transactions reduce cash dependence and, thus, deposit leakage at the macro level, while helping banks tap digitally savvy new-age customers and their transaction flow, leading to better customer float/deposit growth. That said, branches remain the indispensable source of deposit mobilization, not only in India but also in foreign countries. This is evident in the strong positive correlation between Branch-Deposit market-share gains for banks even in the current digital world. Branches also help banks deepen the retail lending business in non-metros and, thus, feed it back into retail deposit growth. Additionally, though metros remain key contributors of deposits, their share is on a steady decline; hence, we believe banks focusing on Urban + SURU branches (including ‘Hindi Heartland States’ given their long-term potential on credit/deposit front) will benefit in the long term.

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