FORESIGHTS
Season of Trade deals
This financial year kicked off with Trump introducing steep tariffs affecting nearly all trade partners. Despite the usual uncertainties characteristic of Trump, one thing is clear: tariffs will continue to be a key issue worldwide. Against this backdrop, nations are keen to swiftly finalise trade agreements that have been in the works for many years. Case in point is the India-UK trade deal, which was signed earlier this month.
This assumes importance, as India and the UK are the world’s fifth- and sixth-largest economies, with a combined total GDP of USD 8 trillion. From India's perspective, the primary industries that will benefit are textiles, footwear, and seafood.
Currently, tariffs in these sectors stand at around 10%, and they will soon be close to 0%. Notably, key competitors like Vietnam and Bangladesh already operate with near 0% tariffs. As a result of this trade agreement, we can enhance our competitiveness and seize a larger market share. For the UK, the benefiting industries will be the liquor and automotive sectors. For liquor, the duty will be halved to 75%. For automobiles, the duty will be reduced to 10%, albeit only for a limited quota, which has not yet been finalised. The adverse impact on the domestic liquor and automotive industries may be limited, as imports will primarily target the luxury segment, where domestic presence is limited.
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India Amid the Global Turmoil
Indian economy, with low external trade exposure, is relatively better placed amidst the global trade war. However, in this intertwined world, India cannot remain unscathed from heightened global uncertainties. India’s GDP growth was moderating even before the trade war erupted. Wide-based consumption spending in the economy remains elusive, while private investment is still not roaring back. The global trade war is expected to dent India’s economic growth outlook further.
The silver lining amid concerns about growth is the moderation in domestic inflation. With inflation under control, the RBI has focused on supporting growth, cutting interest rates twice (cumulatively 50 bps) and changing its stance to accommodative.
We estimate India’s GDP growth to moderate to around 6.4% in FY25, from an average growth of 8.4% in the previous two fiscal years. The slower growth can be attributed to a brake on Government investment (due to elections), even while private investment remained feeble. Moreover, there has been some dwindling in urban consumption spending, though rural consumption has continued to improve. GDP growth is expected to pick up sharply in Q4 FY25, led by a bounce back in government investment and increased spending in this quarter due to the Maha Kumbh festival.
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The second edition of CareEdge State Rankings presents a comprehensive assessment encompassing seven key pillars – Economic, Fiscal, Infrastructure, Financial Development, Social, Governance and Environment – together capturing 50 indicators. The assessment comprises large states categorised as Group A and North-East, Hilly & Small States categorised as Group B.
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Indian banks saw strong credit growth in FY24, achieving a credit growth of 16.4% (excluding the HDFC merger). However, in FY25, credit growth has slowed, primarily due to a deceleration in other personal loans and lending to non-banking financial companies (NBFCs). FY25 has closed with a growth of around 11%, with personal loans remaining the largest segment, and industrial sector growth not showing significant improvement. CareEdge estimates credit growth to be between 11.5% and 12.5% in FY26 as banks balance growth and margins while maintaining the credit-to-deposit (C/D) ratio.
Banking Credit Offtake Set to Improve in FY26 due to Lower Base and Increased Demand The recent period has been marked by a structural shift in the performance of India’s banking sector, with the sector seeing a substantial reduction in the overhang of stressed assets. On a y-o-y basis, growth in bank credit has slowed below the long-term growth rate and has converged towards deposit growth during FY25. The bank group-wise break-up shows a moderation in credit growth for both public sector banks (PSBs) and private sector banks (PVBs). Meanwhile, the elevated credit offtake numbers due to the HDFC-HDFC Bank merger have largely dissipated. Credit has continued to outpace deposit growth. A part of the funding gap was met through SIGHTS FOR Certificates of Deposits (CDs), reduced surplus SLR investments, market borrowings, and avenues such as refinancing from financial institutions.
capital market borrowings by NBFCs. The recent rollback of risk weights suggests that the RBI is comfortable with NBFCs in these asset classes. Although most banks have enough equity to meet additional capital requirements, the increased risk weight has made them more cautious about lending to NBFCs.
Consequently, the growth in advances to NBFCs is unlikely to return to pre-circular levels in the near term, given the competitive intensity and favourable rates available in the capital markets compared to bank financing for top-rated NBFCs. India has a relatively low bank credit-to-GDP ratio compared to other countries and continues to present significant headroom for growth on an aggregate basis. Credit offtake has moderated in FY25. This slowdown has been primarily driven by decreased unsecured retail lending and slower advances to NBFCs.
Recently, RBI rolled back the risk weights, which is likely to result in more funds being made available to banks to on-lend to NBFCs and is expected to lead to lower borrowing costs for NBFCs. This change, along with the deferral of the LCR framework, is expected to improve the bank credit growth in FY26 compared to FY25.
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According to CareEdge Ratings, in the natural gas sector, the contribution from City Gas Distribution (CGD) accounted for 20% in FY24 and is projected to increase to 25% by 2030. CareEdge Ratings anticipates that gas consumption volumes for the sector will grow at a Cumulative Average Growth Rate (CAGR) of 10% during FY25- 30. According to CareEdge Ratings, volumes are expected to expand at a sustainable compound annual growth rate (CAGR) of ~10% over FY25- 30, supported by capital expenditure (capex) of Rs 30,000 crore during FY25-FY27.
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Developed nations, such as the USA, Germany, and Japan, spend a higher percentage of their GDP on healthcare, resulting in better health infrastructure and outcomes. In contrast, developing countries, such as India, allocate a smaller portion of their GDP to healthcare, resulting in gaps in the quality of service and infrastructure.
India's healthcare expenditure is relatively low compared to other developing countries. As of 2022, India has allocated around 3.3% of its GDP to healthcare, below the average of 5.1% for developing countries. Additionally, India's per capita healthcare expenditure is ~$80, significantly lower than the sample average of ~$354 for developing nations. This underinvestment has resulted in inadequate healthcare infrastructure and services, although there has been some improvement over the last decade.
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On April 09, 2025, the Reserve Bank of India (RBI) released draft directions on non-fund-based credit facilities, including a new framework for extending partial credit enhancement (PCE). Key revisions proposed include (i) extension of eligibility for providing PCE to All India Financial Institutions (AIFIs), NBFCs and HFCs alongside commercial banks [together referred to as Regulated entities (RE)], (ii) increase exposure limit by a single RE to 50% (from present 20%) and (iii) reduction in capital requirement norms, linking it to PCE amount vis-à-vis bond issue size as per existing framework.
The proposed changes in the scheme have been aimed at addressing the bottlenecks in the current framework, which has hindered its acceptance. The PCE scheme, initially released on September 24, 2015, stipulated that banks can provide credit enhancement to investment-grade bonds as a contingent line of credit of up to 50% of the proposed bond size to provide shortfall support. The framework aimed to shift the pressure on the banking system by facilitating increased bond issuances; however, the on-ground issuances remained abysmally low over the last decade. IIFCL, an early entrant SIGHTS from even before the RBI’s scheme on PCE, had sanctioned Guarantees aggregating ~ Rs 2,400 crore (as on Mar 31, 2024) for bond issuances exceeding Rs 9,000 crore by 20 infrastructure projects.
As seen above, irrespective of the PCE coverage and rating category, there is likely to be a reasonable reduction in capital requirements under the proposed framework.
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The securitisation market reached an all-time peak in FY25, with total volumes reaching Rs 2,68,000 crore (CareEdge Ratings' estimate), encompassing both pass-through certificates (PTC) issuances and direct assignment (DA) transactions. In FY25, the market experienced a robust growth of approximately 39% (CareEdge Ratings' estimate) compared to FY24.
The securitisation market issuances gained momentum in the second quarter of the current fiscal year, primarily driven by substantial contributions from private banks and other large originators and continued demand for loans that meet Priority Sector Lending (PSL) norms.
The aggregate volume for Q4FY25 stood at around Rs 69,000 crore, up from Rs 62,000 crore for Q4FY24. The DA volume was marginally higher than the PTC volume, constituting 51% of the overall volume. The share of PTC issuances was higher than DA volumes over the first nine months of FY25. However, large DA transactions in the last quarter pulled overall DA volumes ahead of PTC issuances in FY25. The securitisation market also entered over 45 new originators in FY25.
Asset-backed securitisation (ABS) pools constituted a substantial portion of the total PTC issuances, accounting for almost 84% in terms of volume, with the share of Mortgage-backed securitisation (MBS) transactions reducing to 10% (14% in FY24). The share of PTC issuances originated by the Microfinance Institutions (MFI) also declined to 6% of total PTC issuances (12% in FY24).
Vehicle loan financing, including loans against commercial vehicles, cars, two-wheelers, construction equipment, and tractors, accounted for over Rs 93,000 crore, making up 71% of overall PTC issuances. Mortgage-backed transactions dominated the DA segment in FY25, comprising 62% of DA volumes, while Asset-backed DA transactions accounted for 26%. The overall proportion of DA transactions backed by MFI loans dropped to around 12% compared to 25% in FY24.
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