ICRA Ratings has said that improved asset quality and consequently lowers credit provisions could drive better profitability for banks and provide impetus to lenders and rejuvenate their lending decisions. Low interest rates, improved business volumes, better job prospects and income levels could also stimulate credit demand next year. This coupled with better competitive positioning of banks vis a vis other lenders driven by steep decline in cost of deposits could improve bank credit growth to 6.0-7.0% in FY2022 from an estimated 3.9-5.2% in FY2021 and 6.1% in FY2020.
As moratorium on loan repayments is over and though we await the 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 H2 FY2021 as well, the credit rating agency said.
However 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%. The loan restructuring requests much lower than previously estimated which has been supported by sharper than expected improvement in economic activities as well liquidity support through emergency credit line guarantee scheme. Accordingly, ICRA revised its loan restructuring estimates downward to 2.5-4.5% of advances as against 5-8% estimated earlier.
Commenting on these developments, Anil Gupta, Sector Head - Financial Sector Ratings, ICRA Ratings said, "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. This will lead to lower credit provisions and better profitability in FY2022."
ICRA expect the credit provisions are estimated to decline to 1.8-2.4% of advances during FY2022 from an estimate of 2.2-3.1% in FY 2021 and 3.1% in FY2020, which will lead to improvement in return on equity (RoE) for banks.
The rating agency expect public banks to break-even after six consecutive years (FY 2016- FY 2021) of losses and generate RoE of 0.0-5.4% for FY 2022 ( -2.3% / 3.7% for FY 2021 and -6.5% for FY 2020). The RoE for private banks is also estimated to improve to 9.5-10.5% in FY 2022 (2.0-7.5% in FY 2021 and 6.5% for FY 2020).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.
The AT-I bond market for public banks has revived in current year with more public banks issuing AT-I bonds as compared to last year. In additional few public banks have been also able to raise equity capital totalling Rs 75 billion from markets after a long gap of almost three years. This coupled with Government of India’s (GoI's) budgeted equity capital infusion of Rs 200 billion for FY 2021 should suffice for FY 2021.
"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 Gupta.
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