Credit offtake to pick in FY22 on easing asset quality concerns for banks: Report

Credit offtake to pick in FY22 on easing asset quality concerns for banks: Report

Credit growth is expected to pick up in FY’ 22 on improved asset quality which could result in better profitability for banks and provide impetus to lenders to revive lending, according to a report by ratings firm Icra said. Low interest rates, improved business volumes, better job prospects and income levels could also stimulate credit demand next year, it said.

Banks will also be in a better position to price their loans competitively on account of steep decline in cost of deposits. Credit growth for FY’22 is pegged at 6.0-7.0% from an estimated 3.9-5.2% in FY2021 and 6.1% in FY2020.

As moratorium on loan repayments is over amidst backdrop of Supreme Court directive of on asset classification, the Gross NPAs and Net NPAs for the banks are likely to rise in near term to 10.1-10.6% and 3.1-3.2% respectively by March 2021 from 7.9% and 2.2% respectively as of September 2020 and the resultant elevated credit provisions during second half of FY’2021 as well.

Net NPAs and credit provisions will subsequently trend lower in FY2022 as the banks have reported strong collections on their loan portfolio with most banks reporting collections of over 90% and loan restructuring requests much lower than previously estimated Icra estimates restructuring at 2.5-4.5% of advances as against 5-8% estimated earlier.

, “With expectations of sustained collections and lower restructuring, the asset quality is expected to improve further with net NPA declining to 2.4-2.6% by March 2022″ said Anil Gupta, Sector Head – Financial Sector Ratings, Icra. ” This will lead to lower credit provisions and better profitability in FY2022.”

Icra expects credit provisions decline to 1.8-2.4% of advances during FY’22 from an estimate of 2.2-3.1% in FY 21 and 3.1% in FY2020, which will lead to improvement in return on equity (RoE) for banks. Icra expects public banks to break-even after six consecutive years (FY’16- FY’21) of losses. RoE of 0.0-5.4% for FY’22 ( -2.3% / 3.7% for FY’21 and -6.5% for FY’20). The RoE for private banks is also estimated to improve to 9.5-10.5% in FY’22 (2.0-7.5% in FY’21 and 6.5% for FY’20).

“Public banks will need to raise additional capital of upto Rs 430 billion next year as they have call options falling due on the AT-I bonds totalling Rs 233 billion during FY 2022. Capital will also be required to support credit growth as their internal capital generation could remain weak even next year. Ability of public banks to raise capital from markets will be critical to reduce GoI’s recapitalisation burden next year” adds Mr. Gupta.

The capital position for large private banks is strong and can withstand the stress case scenario for asset quality after these banks raised Rs 544 billion of capital during 9M FY 2021. With large capital raise and expectations of improved profitability, the banks are also well placed to exercise call options on their Rs 260 billion of AT-I bonds falling due in FY 2022 and FY 2023 without a significant impact on their capital. The rating agency expect capital requirements for private banks to be limited to few mid-sized and small private banks at less than Rs 100 billion till FY2022.

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