Better asset quality to boost banks' credit, earnings growth in FY22: ICRA

Indian banks will see moderation in asset quality pressure by the end of the next fiscal, which would translate into better credit and earnings growth, revealed a recent report by ICRA on Monday. The rating agency has assigned stable outlook for banking sector in 2021-22.

ICRA expects net non-performing assets (NNPAs) of the banks declining to 2.5 per cent by March 2022 from estimated 3.1 per cent as of March 2021 and 3 per cent for March 2020. While net NPAs of private banks have been pegged at 1.4-1.5 per cent by March 2022, for public sector banks it has been projected at 3.1-3.4 per cent for the same period.

The agency, however, expects public banks' gross non-performing assets (GNPAs) to rise to 13.3-13.7 per cent by March 2021 and 14.1-14.8 per cent by March 2022. In case of private banks, it is seen rising to 6.5-7.3 per cent by March 2021 and 7.5-8.4 per cent by March 2022.

"As moratorium on loan repayments is over and though we await the Supreme Court directive on asset classification, the GNPAs and NNPAs for banks are likely to rise in near term to 10.1-10.6 per cent and 3.1-3.2 per cent, respectively, by March 2021, from 7.9 per cent and 2.2 per cent, respectively as of September 2020," the rating agency said in a report.

"Lower net NPAs to improve solvency profile for both public and private banks by March 2022," it added.

ICRA expects banks' credit growth to pick up to 6-7 per cent in FY22 as against estimated 3.9-5.2 per cent in FY21 and 6.1 per cent in FY20. It expects deposit growth to remain steady at 9.5-10 per cent in FY22 as against estimated 9.6-10.3 per cent in FY21 and 7.9 per cent in FY20.

The report further stated that loan restructuring requests are much lower than previously estimated, supported by sharper than expected improvement in economic activities as well liquidity support through the government's emergency credit line guarantee scheme. It has revised its loan restructuring estimate downwards to 2.5-4.5 per cent of advances as against 5-8 per cent estimated earlier.  

The public sector banks will need to raise additional capital of up to Rs 43,000 crore next year as they have call options falling due on the Additional Tier-1 (AT-I) bonds totalling Rs 23,300 crore during 2021-22, ICRA's sector head (financial sector ratings) Anil Gupta said. The incremental capital raise by public banks from market sources (equity and bonds) will reduce their dependence on the government, he added.

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