Banking sector health at its best in decades

India Ratings and Research (Ind-Ra) has revised the outlook on the overall banking sector to improving for FY23 from stable, as the banking system’s health is at its best in decades. The improving health trend that began in FY20 is likely to continue into FY23, Karan Gupta, Director, Ind-Ra, said in a report.

Furthermore, key financial metrics are likely to continue to show improvement in FY23, backed by strengthened balance sheets and an improving credit demand outlook with an expected commencement of corporate capex cycle.

While the tightening liquidity would push up interest rates, impacting treasury gains, it would at least partially offset in the short term as loans get repriced faster than deposits, as per Ind-Ra’s assessment. Almost one-third of the system’s loans are linked to external benchmark rates.

Ind-Ra has marginally revised its credit growth estimates to 8.4 % from 8.9 % for FY22 and 10 % for FY23. The growth will be supported by a pick-up in economic activity post Q1 FY22, higher government spending on infrastructure and a revival in retail demand.

The credit agency estimates gross non-performing assets (GNPAs) at 6.3 % and stressed assets at 8.7 % for FY22 and at 6.1 % and 7.6 %, respectively, for FY23. It expects provisioning cost for FY22 at about 1.5 % and 1 % in FY23.