India Ratings maintains stable outlook on banking sector in FY22

India Ratings, a domestic rating agency, kept its banking sector outlook steady for 2021-22, predicting a rise in stressed assets in the retail and MSME categories by end-March.

For fiscal 2021-22, it expects the banking sector's gross non-performing assets (GNPA) to be 8.6% and stressed assets to be 10.3%.

“We have maintained a stable view on the entire banking sector for the remainder of FY22, backed by continued systemic assistance that has helped manage the system-wide COVID-19 related stress.” the rating agency said in its mid-year banks outlook issued on Tuesday.

Banks will continue to improve their financials by raising capital and increasing provision buffers, which have already increased dramatically over the previous three to four years, according to the report.

The agency's steady view on big private banks implies that they will continue to increase market share in both assets and liabilities, despite fierce competition from public sector banks (PSBs), according to the agency. Most have increased their capital buffers and handled their portfolios more aggressively.

The outlook for PSBs is based on continuing government assistance in the form of substantial capital injections (Rs. 2.8 lakh crore (US$ 38.11 billion) from FY18 to FY21, with an additional Rs. 0.2 lakh crore (US$ 2.7 billion) allocated for FY22), according to the report.

The agency maintains a negative outlook on five banks (which account for roughly 6.5% of system deposits), owing to inadequate capital buffers and ongoing franchise pressure.

It is estimated that private banks have had a greater influence on asset quality in the retail segment, with a median increase in gross nonperforming assets of nearly 100% from Q1 FY21 to Q1 FY22 (about 45% for PSBs).

“Banks have also restructured retail assets (including home loans), perhaps delaying an early spike in slippages. the segment’s overall stressed assets (GNPA + restructured) are anticipated to rise to 5.8% by end-FY22,” according to the report.

Demonetisation, the implementation of GST and RERA, the slowing down of major corporations, and now COVID-19 have all put pressure on the MSME sector, according to the report.

The government, on the other hand, has aided the sector by providing liquidity through the Emergency Credit Line Guarantee Scheme (ECLGS) and restructuring, it said, adding that it anticipates a fraction of such advances to begin departing moratoriums in Q3 FY22, with some of them slipping.

MSMEs' GNPAs are anticipated to rise to 13.1% by the end of FY22, up from 9.9% in FY21. Stressed assets would also rise from 11.7% to 15.6%.

The agency expects GNPAs to rise to 10.2% in the business category and stressed assets to rise to 11.3%.

The rating agency has retained its FY22 credit growth forecast at 8.9%, citing a pick-up in economic activity following Q1 FY22, greater government investment, particularly on infrastructure, and a resurgence in demand for retail loans as reasons.

For the second half of FY22, the agency revised the outlook for retail non-banking finance companies (NBFCs) and housing finance companies (HFCs) from steady to improving last week.

Nonbanks have appropriate system liquidity (thanks to regulatory measures), adequate capital buffers, consistent profitability due to low funding costs, and on-balance sheet provisioning buffers, according to the report.

These variables give “adequate cushion to manage the problems that may arise from a depressed operating environment, leading to an increase in asset quality challenges as a result of the second covid wave hitting non-bank disbursements and collections,” it had stated.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.