A recent report from CareEdge, a ratings company, says that banks are likely to face higher credit costs in the near future. These costs, which are currently very low at 0.5% of their total loans, are expected to increase. Sanjay Agarwal, the senior director, didn’t say exactly how much they will rise.
Credit costs are also predicted to go up for non-bank lenders, especially microfinance companies. CareEdge estimates that these companies will see their credit costs rise to 6.5% of their loans in the next financial year, jumping from 2.5% this year.
Higher credit costs could hurt the profits of these banks and microfinance companies. Analysts are concerned that it will affect their ability to grow.
For the overall economy, CareEdge expects the GDP growth to be 6.5% for FY25 and improve slightly to 6.7% in FY26. However, several factors like decreased government spending, a longer-than-usual monsoon, and lower demand in cities have slowed down growth in the first half of FY25. Still, they predict that growth will pick up in the second half as people start spending more and the government starts investing again.
Even though government spending is expected to improve, it might fall short of the initial goal of 11.1 lakh crore by about 1.5 lakh crore. So far this year, the government has spent around 42% of its budget. Last year, it managed to use 95% of its planned budget of 10 lakh crore.
CareEdge also thinks that the Reserve Bank of India might lower interest rates by 0.5%-0.75% starting in February 2025. This is because food prices are expected to go down after a strong harvest. As a result, they predict that the yield on the 10-year government bonds will drop to 6.50-6.60% by the end of the financial year, down from 6.73%.
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