New Delhi, Feb 5 (PTI) S&P Global Ratings on Monday said strong credit growth of Indian banks could moderate to 12-14 per cent in the next fiscal if deposit growth remains tepid.

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

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Banks may be compelled to look for wholesale funding, S&P said, adding that higher costs of such funding could further strain margins and hurt profitability.

Rising cost of funds and potential rate cuts in fiscal 2025 will squeeze net interest margins, it added.

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"Liquidity is tightening for Indian banks. The sector's strong credit growth could moderate to 12-14 per cent in fiscal 2025 if deposit growth remains tepid, compounded by higher deposit costs and competition for funds," S&P said in a report titled 'Tight liquidity shackles Indian banks' robust credit growth'.

S&P expects the share of unsecured personal loans in the banks' total loan book to 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 recent ruling on applying higher risk weights to unsecured personal loans has not yet hindered rapid growth in this segment, S&P said.

Stable asset quality and steady capitalisation support the banks' credit profiles.

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

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