Credit Growth in FY23 to Reduce Excess Liquidity in the Banking System: ICRA

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ICRA observed that credit growth would come from the non-food segment

ICRA Ratings expects outlook for banks to be ‘stable’ in FY23, with credit growth improving from 8.9% to 10.2% and lower credit provisions . However, the performance of the restructured loan portfolio poses uncertainty about the quality of the assets, he warned.

In its latest financial sector research note, the ratings agency estimated credit growth for FY22 for banks at 8.3% compared to growth of 5.5% for FY21. .

ICRA estimated that gross non-performing assets (NPAS) will fall to 5.6-5.7% by March 2023, from an estimate of 6.2-6.3% by March 2022, while net NPAs will fall to 1.7-1.8% from the estimate. 2% by March 2022.

The agency further observed that bank credit growth would come from the non-food segment which continues to be driven by the retail and MSME (micro, small and medium enterprises) segments; and partly through co-loan agreements with non-bank financial companies (NBFCs).

ICRA said the wholesale credit growth segment will be supported by the shift in demand from the debt capital market to bank credit, in an upside yield scenario as seen over the course of the year. of the 2019 financial year.

Credit growth to reduce excess liquidity

“Credit growth will reduce excess liquidity in the banking system to $1.5-2.5 million. In addition, RBI may also suck up excess liquidity.

“Drivers of growth will be a strong corporate credit ratio, tight underwriting in the retail and MSME segments; reduce bounce rates and improve recoveries,” the note states.

Treasury revenues will decline significantly in FY23 in a scenario of rising bond yields. Despite this, return on assets (RoA) is expected to improve, supported by better credit growth and lower credit provisioning as old net assets under stress continue to decline, according to the research note.

Anil Gupta, ICRA Vice President, said, “…credits and other provisions are expected to decline to 1.3-1.4% of advances in FY23 from 1.7-1.8 % estimated in FY22. While there are positives, deposit growth is expected to slow to 7.3-7.9% in FY23 (8.3% in FY23). fiscal year 2022 and 11.4% in fiscal year 2021).

Restructured loan portfolio

Gupta observed that the challenges for the sector emanate from the performance of the portfolio of restructured loans, which poses uncertainty on the quality of the assets as these loans come out of the moratorium.

“In addition, the Russian-Ukrainian conflict poses macro-economic challenges related to cost inflation, rising interest rates and exchange rate volatility, which could put pressure on the quality of The high level of delinquent loans in the retail and MSME segments post-Covid also remains a concern,” he said.

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

In terms of earnings, PSO return on assets (RoA) and return on equity (RoE) will remain stable at 0.5-0.6% and 8.6-9.6%, respectively for FY23 (0.5-0.6% and 8.1-9.0%). cent estimated for FY22), according to the agency.

For PVB, RoA and RoE are expected to remain stable at 1.3% and 10.8-11.1%, respectively, for FY23 (1.2% and 10.5% estimated for FY22 ), despite the moderation in cash income from PSOs and PVBs, the agency mentioned.

Published on

April 05, 2022

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