Bank Q3 Results reflect slower credit growth

Overview
In the Indian banking space, both private and public sector banks have seen a sharp decline in credit growth in the past few months and this reduction is likely to get spilled in the financial year of 2025-26 as well. This slowdown trend is evident in the credit growth update from the Q3 results of most banks showcasing the same. Although banks have reflected increments in advances and deposits, the credit expansion and disbursement rate has taken a hit compared to previous growth rates over the past few quarters. There are many reasons for this credit growth rate erosion but the factor that stands out is RBI’s excessive crackdown on lending on unsecured loans. This is when RBI expressed a concern on bad loans thus increasing the capital requirement for personal loans and credit card loans. This has also prompted banks to improve their already high credit-to-deposit (CD) ratios. ICRA predicts that loan growth will fall to 9.7% -10.3% in the fiscal year ending March 2026. This reduction would be the result of banks lowering CD ratios and changing the implementation of adjustments in the liquidity coverage ratio framework, which would take effect in the next fiscal year.

Quarter 3 Results
Coming to the Q3 results for banks, earnings in the third quarter of FY25 will be modest, owing to weaker business growth, static margins, and asset quality stress. According to Nuvama Research, the third quarter of FY25 was difficult due to rising credit costs, slowing loan growth, a deposit shortage despite slowing loan growth, mild pressure on net interest margin (NIM), and decreased trading gains. Speaking of asset quality, micro-finance loans including unsecured loans continue to put pressure on banks’ balance sheets. While banks like HDFC, ICICI, and some state banks are less vulnerable to this factor but micro-finance Institutions (MFIs) lenders are set to see a sharp deterioration. Banks that have quite the exposure for these unsecured loans include Bandhan Bank, IndusInd Bank, and RBL Bank. IndusInd Bank reported a 0.75 percent dip in deposits and a 2.8% increase in advances, whereas YES Bank’s deposit growth was nearly unchanged sequentially and advances increased by 4.22%. Meanwhile, RBL Bank’s deposits fell by 1.11 percent, compared to a 3.3% fall, while Bandhan Bank’s deposits increased by 2.02%, despite a 1.06% loss in loans.

According to brokerage Motilal Oswal, systemic credit growth has fallen to 11.5% from a previous high of 16%, owing to a slowdown in unsecured retail and demand deceleration in certain other secured areas. While a few banks, like as IndusInd Bank and RBL Bank, have already reduced their growth forecasts, select large banks are also expected to publish sluggish full-year growth forecasts due to a high credit-deposit (CD) ratio and mounting asset quality worries. In Q3, HDFC Bank’s advances increased by 3% year on year to ₹25.42 lakh crore, while deposits increased by 16% to ₹25.63 lakh crore. According to preliminary data supplied by banks, only IDBI Bank and IndusInd Bank showed loan growth outpacing deposit growth during the quarter.

HDFC Case
Analysing HDFC Bank’s case, the gap between credit and deposits was glaring. Deposits increased five times faster than loans, by 15% year on year, compared to 3% loan growth in the third quarter. More importantly, the December quarter marked the first time since the bank acquired its parent in July 2023 that the bank’s aggregate deposits exceeded its total loan book.
Total deposits climbed by 15% year-on-year to Rs 25.63 lakh crore, with loan book at Rs 25.42 lakh crore. To put it in perspective, in the quarter ending December 2023, the gap between HDFC’s loans and deposits was a huge Rs 2.55 lakh crore, with deposits at Rs 22.14 lakh crore and loans at Rs 24.69 lakh crore. HDFC Bank sold Rs 21,600 crore of loans through securitization during the quarter, bringing the total amount sold to Rs 46,300 crore for the fiscal year, allowing the bank to reduce its C/D ratio from 110% in July 2023 to 87% in September. The lender’s deposit growth rate was 15.8% over the previous year and 2.5% quarterly.
Consequently, HDFC Bank Ltd. was the second largest contributor to the 350-point decline in the Nifty 50 index on Monday, January 6. The stock is adding approximately 40 points to the Nifty’s downward trend. The stock was the greatest contributor to the Nifty’s decline on Friday, with losses of more than 2.5%.

PSU Banks
Shares of state-owned banks fell on Monday (6th of January, 2025) after these banks reported modest deposit and credit growth data for the October-December quarter (Q3) of 2024-25 (FY25). The Nifty PSU Bank index fell 4%, with Union Bank of India emerging as the biggest loser, with its shares falling 7.5% to close at Rs 114.7, followed by a 5.7% drop in shares of Bank of Baroda (BoB) to Rs 228 and a 4.7% slide in shares of Bank of India to Rs 99.8 on the NSE. Meanwhile, the Pune-based Bank of Maharashtra reported a slight 1% increase in deposits, but advances increased by 5.13 percent sequentially. PNB’s deposits increased by 4.9% in the third quarter of FY25, while advances increased by 4.7%.

To summarise, according to central bank data, retail credit growth fell to 16.3% in the fortnight ending November 29, 2024, down from 18.7% in the same time in 2023, owing mostly to a drop in growth of personal loans and auto loans. Auto and personal loan growth has been cut in half, to 10% from 21% and 12% from 25% a year ago, according to central bank data. Credit card outstanding growth has also slowed to 18% in November 2024, down from 34% the previous year. Thus, to rescue this situation, RBI is expected to induce liquidity soon by way of further rate cuts which would allow the deposits and advances to grow in tandem with GDP of the nation.

The image added is for representation purposes only