ICRA Ratings expects the outlook for banks to be ‘stable’ in FY23, driven by improved credit growth of 8.9-10.2 per cent and decline in credit provisions. However, performance of restructured loan book poses uncertainty to asset quality, it cautioned

In its latest research note on the financial sector, the rating agency has estimated FY22 credit growth for banks at 8.3 per cent against 5.5 per cent growth in FY21.

ICRA assessed that gross non-performing assets (NPAS) will decline to 5.6-5.7 per cent by March 2023 as against estimate of 6.2-6.3 per cent by March 2022, while the net NPAs will decline to 1.7-1.8 per cent as against estimate of 2 per cent by March 2022.

The agency further observed that banking credit growth would come from non-food segment which continues to be driven by retail and MSME (micro, small and medium enterprise) segments; and partially by co-lending arrangements with non-banking finance companies (NBFCs).

ICRA said wholesale credit growth segment will be be supported by demand shift from debt capital market to bank credit, in a rising yield scenario as was seen in FY19. 

Credit growth to reduce liquidity surplus

“Credit growth will reduce liquidity surplus in the banking system to ₹1.5-2.5 lakh crore. In addition, RBI may also suck out surplus liquidity.

“The growth drivers will be strong corporate credit ratio, tightened underwriting in retail and MSME segments; reducing bounce rates and improving collections,” the note said.

Treasury income will decline materially during FY23 in a rising bond yield scenario. Despite this, the return on assets (RoA) is estimated to improve, supported by improved credit growth and decline in credit provisioning as legacy net-stressed-assets continue to decline, per the research note.

Anil Gupta, Vice-President, ICRA said, “…credit and other provisions are estimated to decline to 1.3-1.4 per cent of advances in FY23 as against estimated 1.7-1.8 per cent in FY22. While there are positives, the deposit growth is expected to slowdown to 7.3-7.9 per cent in FY23 (8.3 per cent in FY2022 and 11.4 per cent in FY2021).”

Restructured loan book

Gupta observed that challenges for the sector emanates from performance of restructured loan book which poses uncertainty to asset quality as these loans exit moratorium.

“Also, Russia-Ukraine conflict poses macro-economic challenges related to cost inflation, higher interest rates and exchange rate volatility, this could pressurise asset quality. Elevated level of overdue loans in retail and MSME segments post-Covid also remain a concern,” he said.

In terms of regulatory and growth capital requirements, ICRA assessed that public sector banks (PSBs) will be self-sufficient in FY23 while the incremental capital requirement for private sector banks (PVBs) too are estimated at less than ₹10,000 crore.

Earnings-wise, the return on assets (RoA) and return on equity (RoE) for PSBs will remain steady at 0.5-0.6 per cent and 8.6-9.6 per cent, respectively for FY23 (0.5-0.6 per cent and 8.1-9.0 per cent estimated for FY22), according to the agency.

For PVBs, RoA and RoE are likely to be steady at 1.3 per cent and 10.8-11.1 per cent, respectively for FY23 (1.2 per cent and 10.5 per cent estimated for FY22), despite moderation in treasury income for PSBs and PVBs, the agency said.

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