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Domestic rating agency India Ratings and Research (Ind-Ra) on Tuesday maintained a stable outlook on the overall banking sector for the rest of FY22, and expects banks to continue strengthen their financials by raising capital and adding to provision buffers which have already seen a sharp increase in the last three to four years.

The ratings agency has kept its FY22 credit growth estimates unchanged at 8.9% for FY22, supported by a pick-up in economic activity post 1QFY22, higher government spending especially on infrastructure and a revival in demand for retail loans.

Ind-Ra estimates GNPA at 8.6% and stressed assets at 10.3% for FY22. The agency expects provisioning cost to increase to 1.9% from its earlier estimate of 1.5% for FY22.

Large private lenders

The agency’s stable outlook on large private banks shows their continued market share gains both in assets and liabilities, while competing intensely with public sector banks (PSBs). Most have strengthened their capital buffers and proactively managed their portfolio. As growth revives, large private banks are likely to benefit from credit migration due to their superior product and service proposition.

PSU banks

The rating agency’s outlook on public sector banks factors in continued government support through large capital infusions (about Rs 3 trillion), leading to a significant boost in capital buffers over the minimum regulatory requirements, significant improvement in provision coverage to 68% in FY21 (FY18: 49%), overall systemic support resulting in lower-than-expected Covid-19 stress and smooth amalgamation of PSBs, Ind-Ra said in FY22 Mid-Year Banks Outlook.

The agency has a negative outlook on five banks (about 6.5 per cent of system deposits), driven primarily by weak capital buffers and continued pressure on franchise.

Stressed assets

Ind-Ra estimates that the higher impact on the asset quality impact in the retail segment for private banks. Banks have also undertaken restructuring in retail assets (including home loans), which could have postponed an immediate increase in slippages. Overall stressed assets (GNPA + restructured) in the retail segment is expected to increase to 5.8% by end-FY22.

In the MSME segment, the agency expects GNPAs to increase to 13.1% by end-FY22 from 9.9% in FY21. Stressed assets similarly would increase to 15.6% from 11.7%.