India Ratings and Research (Ind-Ra), a part of Fitch Group, has revised its outlook on the banking sector from "negative" to "stable" for financial year 2021-22 (FY22) on lower-than-expected COVID-19 stress on banks. As per the agency, substantial systemic measures have reduced the system-wide COVID-19 linked stress, while banks have also strengthened their financials by raising capital and building provision buffers.
Ind-Ra has also upgraded its FY21 credit growth estimates to 6.9 per cent from 1.8 per cent on the back of improvement in the economic environment in H2 FY21 and the government's focus on higher spending, especially on infrastructure. The credit growth for FY22 has been pegged at 8.9 per cent.
On asset quality front, the agency pegged bad loans or gross non-performing assets (GNPAs) at 8.8 per cent and 10.1 per cent for FY21 and FY22, respectively. The stressed assets are estimated at 10.9 per cent in FY21 and 11.7 per cent in FY22. The agency said that provisioning cost for FY21 has fallen from its earlier estimate of 2.3 per cent to 2.1 per cent (including COVID-19 linked provisions). It is expected to fall further to 1.5 per cent for FY22, it added.
The agency changed outlook on public sector banks (PSBs) to "stable" for FY22 from "negative", saying that regulatory changes led to an improvement in state-owned banks' ability to raise AT1 capital. High provision cover on legacy bad loans, overall systemic support resulted in lower-than-expected COVID-19 stress, and minimal surprises arising out of amalgamation of PSBs also led to upgradation of state-owned banks.
As per Ind-Ra, the government's allocation of Rs 34,500 crore for infusion in PSBs in current quarter should suffice for their near-term growth needs.
The agency continued to maintain stable outlook on private banks, citing that they continue to gain market share both in assets and liabilities, while competing intensely with PSBs. Most of private lenders have strengthened their capital buffers and proactively managed their portfolio, it said.
As growth revives, large private banks would benefit from credit migration due to their superior product and service proposition.