Bank credit growth likely to be 13% in FY23 on improving demand, says Ind-Ra

The Indian banking sector will continue to improve for the rest of FY23 as the banking system’s health remains to be strong, according to India Ratings and Research (Ind-Ra). The key financial metrics are likely to improve during the rest of FY23, on the back of strong balance sheets and an improving credit demand outlook, especially for working capital.

In its latest report, India Ratings revised its banking credit growth estimate for FY23 to 13.0% YoY from 10.0%. The factors driving this upward revision was higher working capital demand even as capital expenditure is likely to see some moderation, visible shift from capital markets to the banking system for longer term funding due to adverse interest rate cycle and revival of better-than-expected credit demand from the corporate segment, especially in infrastructure and chemicals industries.

The rating agency has given a stable rating outlook for banks for FY23 indicating their waning legacy asset quality issues, strengthened balance sheets, manageable covid-19 impact and expectations of improved profitability across the banking sector.

Within the banking industry, private sector banks are likely to gain market share at a slower pace than earlier as public sector banks (PSBs) expand the loan portfolio faster, supported by healthy balance sheets and encouraging credit demand.

Robust credit demand exceeds deposit generation

As of the last week of August 2022, the system-level credit growth of 15.5%  year-on-year (YoY) exceeded deposit growth of 9.5% YoY and it has resulted in intense competition among banks for deposit generation and increase in deposit interest rates. The rating agency noted that record cash holdings, increasing risk appetite of banks would lead to higher competition for deposits.

India Ratings said that the average amount of certificate of deposits (CD) raised by banks in a month rose sharply to Rs 400 billion in Q1FY23 compared to Rs 80 billion in 3QFY22 and Rs 260 billion in Q4FY22. Meanwhile, the outstanding amount increased three-fold to Rs 2.35 trillion at end-July 2022 from Rs 0.8 trillion at the end of December 2021.

Asset quality improves

The banks’ asset quality metrics have improved in the past few years with the gross non-performing assets (GNPA) ratio for the banking system declining to 6.1% in FY22 from the peak of 11.2% in FY18. The rating agency said that it expects the GNPA to stand at 6.8% in FY23. If the potential write-off of 1.5% is included, the headline GNPA could be around 5.3%. 

Meanwhile, the stressed asset ratio (GNPA + restructured) in the retail asset segment is likely to moderate to 4.3% at end of FY23 from 4.4% at end of FY22, while the stresses asset ratio in the MSME segment is likely to rise to 13.4% from 11.8%.

India Ratings estimates provisioning cost for FY23 at 1% as against 1.4% in FY22. The banking industry’s net interest margin is also likely to see tailwinds as interest rates continue to increase and loans tend to be repriced faster than deposits in a rising interest rate environment.

Impact of rising yields

India Ratings believes that the banks are in a much better position to absorb the impact of rising yields compared to past cycles. In the current rising interest rate cycle, banks are likely to continue to face some pressure on their mark-to-market (MTM) gains from their investment portfolio.

However, the report said that further material impact on MTM in the near term is unlikely in FY23 due to limited pressure on long term interest rates. The yields have declined to 7.14% as on September 14, 2022, from 7.45% as on June 30, 2022, and the banks are estimated to register gains in Q2FY23, if the yields sustain at current levels.