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Indian bank credit could be restricted to 12-14 per cent in fiscal 2025 if deposit growth remains tepid coupled with increasing cost of funds and competition for funds, said S&P Global Ratings in a report.

"Deposit growth continues to lag credit for the Indian banks we rate, leading to tight liquidity conditions," said S&P Global Ratings credit analyst Nikita Anand.

Banks may be compelled to look for wholesale funding. Higher costs of such funding could further strain margins and hurt profitability. In our view, rising cost of funds and potential rate cuts in fiscal 2025 will squeeze net interest margins.

"We expect that the share of unsecured personal loans in the banks' total loan book could continue to rise. This will also help banks to partly mitigate the downside risks to margins from tighter liquidity. The Reserve Bank of India's (RBI) recent ruling on applying higher risk weights to unsecured personal loans has not yet hindered rapid growth in this segment," said S&P Global Ratings.

“Favourable equity markets and operating conditions could spur more banks to raise equity in 2024,” said Anand.

This will support growth plans, offset impact of higher risk weights on unsecured personal loans and loans to non-banking finance companies (NBFC and bring down government ownership to 75 per cent or below to meet minimum public shareholding norms, S&P Global Ratings said.