India Ratings and Research (Ind-Ra) has revised the outlook for the overall banking sector from stable to improving for FY23 as the health of the banking system is at its best in decades. The health improvement trend that began in FY20 is expected to continue in FY23, Ind-Ra Director Karan Gupta said in a report.
In addition, key financial metrics should continue to improve in FY23, supported by strengthened balance sheets and an improving outlook for credit demand with an expected start to the business investment cycle.
While tighter liquidity would push interest rates higher, which would impact cash gains, it would be at least partially offset in the short term, as loans are revalued faster than deposits, according to the evaluation of the Ind-Ra. Almost a third of the system’s loans are linked to external reference rates.
Ind-Ra slightly revised its credit growth estimate to 8.4% from 8.9% in FY22 and 10% in FY23. Growth will be supported by a pick-up in economic activity after the first quarter of FY22, an increase in government spending on infrastructure and a recovery in retail demand.
The credit agency estimates gross non-performing assets (GNPA) at 6.3% and stressed assets at 8.7% for FY22 and 6.1% and 7.6%, respectively, for the year. FY23. He expects the provisioning cost for FY22 to be around 1.5% and 1% for FY23.
PSB: stable outlook
Ind-Ra said its stable outlook for public sector banks (PSBs) for FY23 reflects reasonable capital buffers, low corporate stress overhang in terms of expected slippages and manageable Covid impact. -19.
The agency expects PSBs to seek growth across all sectors and benefit from loan recoveries, given their highest profitability in the past six years. In FY22, Ind-Ra revised the outlook from negative to stable on the long-term issuer ratings of five public banks.
Large PVBs: market share gains
The agency said its stable outlook for large private sector banks (PVBs) for FY23 indicates their continued market share gains in both assets and liabilities.
“Most have strengthened their capital buffers and proactively managed their portfolios. As growth resumes, large private sector banks are expected to experience continued market share gains due to their superior product and service offerings,” according to the report.
Former PVBs: Asset Quality Challenges
Ind-Ra also has a stable outlook on most former PVBs for FY23 who typically have a sticky liability deductible.
However, they would have to invest more in technology to be in the game, otherwise they might not be able to compensate for the price advantage that the big banks can offer. Nonetheless, their asset quality issues could be significant, given their larger proportion of small and medium-sized businesses.
February 17, 2022