India Ratings and Research (Ind-Ra) on Tuesday kept its credit growth estimates for India's banking sector unchanged at 8.9 per cent during FY22 on the back of a pick-up in economic activity post first quarter of FY22, higher spending by the union government, especially on infrastructure, and a revival in demand for retail loans.
The rating agency said it estimates gross non-performing assets (GNPA) to be at 8.6 per cent and stressed assets at 10.3 per cent for FY22, while the provisioning cost for banks will increase to 1.9 per cent from its earlier estimate of 1.5 per cent for FY22.
Ind-Ra maintained a 'stable' outlook on the overall banking sector for the rest of FY22, supported by the continuing systemic support that has helped manage the system-wide COVID-19 linked stress. "Banks also continue to strengthen their financials by raising capital and adding to provision buffers which have already seen a sharp increase in the last three to four years," it said.
The rating agency has a stable outlook on most old private banks with a loyal liability franchise, indicating their continued market share gains both in assets and liabilities while competing intensely with public sector banks (PSBs).
"Most have strengthened their capital buffers and proactively managed their portfolio. As growth revives, large private banks are likely to benefit from credit migration due to their superior product and service proposition," Ind-Ra said.
However, the private banks would need to invest in services and technology orientation even further as they face competition from small finance banks (SFBs), non-bank finance companies and new age players.
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It also has a stable outlook on PSBs which takes into account continued government support through large capital infusions, leading to a significant boost in capital buffers over the minimum regulatory requirements, significant improvement in provision coverage to 68 per cent in FY21, overall systemic support resulting in lower-than-expected COVID-19 stress and smooth amalgamation of PSBs.
For SFBs, Ind-Ra said it has a stable outlook on the back of high capital buffers, high yield loan business and deposit rate and technology-driven traction on the liability side. "Given the growth ambitions of banks and their investors, many of them would aspire to become universal banks so as to be able to service customers across the yield spectrum."
On asset front, the rating agency said the impact of pandemic on the retail segment has been higher for private banks with a median rise of over 100 per cent in gross NPAs over 1QFY21 to 1QFY22. The stressed assets in the segment are expected to increase to 5.8 per cent by the end of FY22.
The MSME segment has been supported by the union government by offering liquidity under the Emergency Credit Line Guarantee Scheme (ECLGS) and restructuring.
"The agency expects that beginning 3QFY22, a portion of such advances would start exiting moratoriums a part of which could slip. Ind-Ra expects GNPAs to increase to 13.1 per cent by end-FY22 from 9.9 per cent in FY21. Stressed assets similarly would increase to 15.6 per cent from 11.7 per cent."
It said the impact of pandemic on the agriculture sector has been lower than on other sectors, and monsoon remains the key monitorable.
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