In a note on Tuesday, ratings agency ICRA said banks could improve lending growth to 8.9-10.2% in FY23, with provisions to be eased. Icra expects banking credit growth to be driven by the retail and MSME segments, and in part through co-lending arrangements with non-banking financial institutions (NBFCs).
The growth for banks will be driven by a strong corporate credit ratio, tightening underwriting in the retail and MSME segments and reducing bounce rates and improving collection, Icra said. Credit growth for FY22 was seen at 8.3%.
Along with the growth of the small loan segment, the wholesale credit segment may also see an increase in demand shift from the credit capital market to bank credit, in a scenario of increasing yields, as seen in FY19. Treasury income will materially decline in FY23 as yields increase. However, the return on assets (RoA) is estimated to be supported by improved credit growth and credit provision reduction because inherited stress assets continue to decline.
Anil Gupta, Vice President, Icra, says that in terms of asset quality, gross non-performing assets (NPAs) are expected to fall from an estimated 6.2-6.3% in March 2022 to 5.6-5.7% by March 2023 and net NPAs will fall to 1.7-1.8% in March 2022 from an estimated 2%. Icra estimates that credit and other provisions will decrease by 1.3-1.4% of the advance in FY23 which was approximately 1.7-1.8% in FY22. Gupta said the growth in deposits will come down to 7.3-7.9% in FY23 from around 8.3% in FY22.
According to Gupta, the challenges for the sector stem from the effectiveness of the restructured loan book, which can create uncertainty in terms of asset quality as restructured loans go beyond the moratorium. “Also, the Russia-Ukraine conflict poses macroeconomic challenges related to cost inflation, high interest rates and exchange rate volatility. This could put a strain on the quality of assets, ”said Gupta.
RoA for Public Sector Banks (PSBs) and Return on Equity (RoE) will remain stable at 0.5-0.6% and 8.6-9.6% for FY23, respectively. Despite moderate treasury income, RoA for private banks could be 1.3% and RoE 10.8-11.1%.
In terms of regulatory and growth capital requirements, PSBs will be self-sufficient in FY23 when the need for increased capital for private banks is estimated to be less than Rs 10,000 crore. Credit growth will reduce the liquidity surplus in the banking system by Rs 1.5-2.5 trillion. Also, the Reserve Bank of India (RBI) could erode its surplus liquidity, Ikra said.