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

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

The growth drivers for banks will be a strong corporate credit ratio, tightened underwriting in the retail and MSME segments and reducing bounce rates and improving collections, Icra said. Credit growth for FY22 is seen at 8.3%.

Along with growth in the small loans segment, the wholesale credit segment may also see growth amid a shift in demand from the debt capital market to bank credit, in a scenario of rising yields, as was seen in FY19. Treasury income will decline materially during FY23 as yields rise. Nonetheless, return on assets (RoA) is estimated to improve, supported by improved credit growth and decline in credit provisioning as legacy stressed assets continue to decline.

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

According to Gupta, challenges for the sector emanate from the performance of the restructured loan book, which could create uncertainty on the asset quality front as restructured loans exit the moratorium phase. “Also, Russia-Ukraine conflict poses macro-economic challenges related to cost inflation, higher interest rates and exchange rate volatility. This could pressurise asset quality,” Gupta said, adding that elevated levels of overdue loans in the retail and MSME segments post-Covid also remain a concern.

The RoA and return on equity (RoE) for public sector banks (PSBs) will remain steady at 0.5-0.6% and 8.6-9.6% respectively for FY23. For private banks the RoA could work out to 1.3% and the RoE to 10.8-11.1% despite moderation in treasury income.

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

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