Bank credit could grow 8.9-10.2% in FY23: Icra

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Banks could see credit growth improve to 8.9-10.2% in FY23, accompanied by lower provisions, ratings agency Icra said in a note on Tuesday. Icra expects bank credit growth to continue to be driven by the retail and MSME segments, and partly by co-lending arrangements with non-bank financial companies (NBFCs).

Growth drivers for banks will be a strong corporate credit ratio, tighter underwriting in the retail and MSME segments and lower bounce rates and improved collections, Icra said. Credit growth for FY22 is estimated at 8.3%.

Along with the growth of the small loans segment, the wholesale credit segment could also experience growth amid shifting demand from the debt capital market towards bank credit, under a rising yield scenario, such as this was observed during FY19. Treasury revenues will decline significantly in FY23 as yields rise. Nonetheless, return on assets (RoA) should improve, supported by improving credit growth and lower credit provisioning as old stressed assets continue to shrink.

Anil Gupta, vice president of Icra, said that in terms of asset quality, gross non-performing assets (GNAs) are expected to decline to 5.6-5.7% by March 2023, from an estimate of 6.2-6.3% in March 2022 and net NPAs. will fall to 1.7-1.8% from around 2% in March 2022. Icra estimates that credits and other provisions will decline to 1.3-1.4% of advances in FY23 from around 1 .7-1.8% in FY22. Deposit growth is expected to slow to 7.3-7.9% in FY23 from around 8.3% in FY22. 22, Gupta said.

According to Gupta, the challenges for the sector emanate from the performance of the restructured loan portfolio, which could create uncertainty about the quality of assets as restructured loans emerge from the moratorium phase. “In addition, the Russian-Ukrainian conflict poses macroeconomic challenges related to cost inflation, rising interest rates and exchange rate volatility. This could put pressure on asset quality,” Gupta said, adding that high levels of delinquent loans in the post-Covid retail and MSME segments also remain a concern.

The RoA and return on equity (RoE) of public sector banks (PSBs) will remain stable at 0.5-0.6% and 8.6-9.6% respectively for FY23. For private banks , RoA could come in at 1.3% and RoE at 10.8-11.1% despite moderating cash income.

In terms of regulatory capital requirements and growth, PSBs will be self-sufficient in FY23, while the additional capital requirement for private banks is estimated at less than Rs 10,000 crore. Credit growth will reduce excess liquidity in the banking system to 1.5-2.5 trillion rupees. Additionally, the Reserve Bank of India (RBI) could also suck up excess liquidity, Icra said.

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