Bank credit is seen growing at a double-digit rate of around 13% in the financial year 2022-23, up from 11.5% in the last fiscal, driven by economic recovery and a boost in demand for retail and working-capital loans, according to Fitch Ratings. The agency, however, expects full-year loan growth to moderate from the 17% year-on-year (YoY) pace in the first half of the current fiscal (H1FY23), due to some base effects and higher interest rates.
“We see bank credit expanding by around 13% in FY23, up from 11.5% in FY22. The acceleration will be driven by the normalisation of economic activity after the Covid-19 pandemic, and high nominal GDP growth, which we expect to boost demand for retail and working-capital loans,” the U.S.-based credit rating agency says in a report on Monday.
Going forward, the agency expects credit demand to stay robust in FY24, assuming continued strong economic expansion coupled with similar levels or slightly higher GDP growth. Fitch has projected India’s real gross domestic product (GDP) growth at 7% in FY23, from the 7.8% estimated earlier.
As per the report, strong loan growth is likely to benefit net revenue, particularly as it will be coupled with wider net interest margins. However, it will put pressure on Core Equity Tier 1 ratios (CET1), if credit growth exceeds Fitch's expectations, limiting buffers to absorb potential future losses, it adds.
The report highlights that rapid loan growth contributed to the system CET1 ratio dropping by nearly 50 basis points in H1FY23, from 13.4% at end-FY22. “Our baseline assumption is that CET1 ratios will fall only modestly, and remain around 13% levels until FY24, as banks step up efforts to raise external capital.”
The agency believes that Indian banks generally remain open to additional capital-raising to fund growth, despite the rise in rates. In the current fiscal year, the Reserve Bank of India (RBI) has increased the repo rate four times to 5.9% to ease inflationary pressure on the economy and combat the effects of a surging dollar against Indian rupee.
The report notes that private banks are generally better than state-owned banks at capital planning, although moves to raise fresh equity are likely to be opportunistic and incremental, which may reduce the risk that they create capital market stress.
On deposits, Fitch says that it plays a large role in banks’ funding mix and is likely to remain a credit strength for Indian banks, despite some normalisation in household savings after being boosted during the pandemic. “We expect greater competition for deposits over time, for example through higher rates on deposit accounts, as banks' liquidity buffers fall in their pursuit of loan growth. Fitch expects system deposits to grow by 11% in both FY23 and FY24, slower than loan growth.”
“Increased deposit rates may put some pressure on banks’ margins, but we expect declining credit costs to offset pressures on profitability - including the valuation impact of higher rates on investments - in FY23. System return on assets exceeded 1% in 1HFY23, up from 0.88% in FY22 by our estimates,” it says.
The agency, however, warns that banks’ increased appetite for risk in a bid for growth could have negative implications for their credit profiles, particularly if loss-absorption buffers are not raised sufficiently, and may affect their viability ratings.
Last week, CRISIL in a report, pegged bank credit growth at around 15% per annum in fiscal 2023 and 2024, riding on broad-based economic recovery and stronger, cleaner balance sheets that allow lenders to expand credit. The estimate factors in an expected 7% increase in GDP this fiscal, as well as impetus to credit growth from the government’s infrastructure push, higher working capital demand in a high-inflation environment, and some substitution of debt capital market borrowings.
In the past 4-5 years, asset quality challenges resulting in higher gross non-performing assets (NPAs), referral to the prompt corrective action (PCA) framework in a number of cases, and limited capital buffers have constrained credit growth, particularly for public sector banks (PSBs). Now, after a significant clean-up and strengthening of balance sheets, supported by substantial equity infusion, PSBs are eyeing higher growth.