India Ratings and Research on Monday revised its banking credit growth estimate for the financial year 2022-23 to 13% year-on-year from 10%.

The stable rating outlook for banks in FY23 indicates their waning legacy asset quality issues, strengthened balance sheets, manageable Covid-19 impact and expectations of improved profitability across the banking sector, says Ind-Ra.

The ratings agency says the factors driving this upward revisions include the rise in working capital demand even as capex is likely to see some moderation, given the build-up of macro uncertainties; with the adverse interest rate cycle, there is a visible shift from capital markets to the banking system for longer term funding and the revival in credit demand from the corporate segment is better than expected, especially in sectors such as infrastructure and chemicals.

Ind-Ra maintained the outlook on the overall banking sector as improving for the rest of FY23, as the banking system’s health continues to be at its best in decades.

The key financial metrics are likely to continue to improve in the rest of FY23, backed by strengthened balance sheets and an improving credit demand outlook, especially for working capital, the ratings agency says.

Within the banking universe, private sector banks are likely to continue to gain market share, though the pace of gains is likely to moderate as public sector banks (PSBs) expand the loan portfolio faster, supported by strong balance sheets and supportive credit demand in the system, says Ind-Ra.

The agency expects credit costs of PSBs and private sector banks to converge and trend lower; this could offset the likely increase in deposit costs for the banks. However, private sector banks are likely to gather pace on deposit accretion, supported by the offering of better yields as competition for deposits intensifies.

The system-level credit growth of 15.5% year-on-year continued to outpace deposit growth of 9.5% as on August 26, 2022, thereby intensifying competition for deposits among banks, on account of widening current account deficit (CAD) and outflows from the capital market, which is estimated to have touched 3.4% of GDP for Q1 FY23, says Ind-Ra.

Additionally, record cash holdings, increasing risk appetite of banks would lead to higher competition for deposits. The tightness in liquidity for banks is visible in the decline in liquidity coverage ratio and higher demand for certificate of deposits (CD) across most large banks and rising marginal cost of funds-based lending rates across banks, says Ind-Ra.

Meanwhile, asset quality metrics continue to improve, with the gross non-performing assets (GNPA) ratio for the banking system declining to 6.1% in FY22 from the peak of 11.2% in FY18. Ind-Ra expects it to increase to 6.8% in FY23. If the potential write-off of 1.5% is included, the headline GNPA could be around 5.3%, says the ratings agency.

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