Indian Banks Are Strongly Placed On Capital Infusion, Says ICRA

Indian banks are well-placed on capital due to benign credit costs, according to ratings agency ICRA. While the prospects for capital raising at public sector banks look promising, private banks, except for a few, are in a good position too.

"The banking sector is expected to continue generating sufficient internal capital to largely meet its growth needs while improving the capital cushions," ICRA Ltd. said in its press release on Thursday.

The agency said that the controlled NPA additions and internal capital generation are likely to keep solvency at its best level in eight years. ICRA expects Tier I capital to be at 14.6–14.7% by March 2024 and solvency levels at 7%.

Credit Growth On The Rise

ICRA sees robust credit growth of up to 13.2% at Rs 16.5–18 lakh crore in the current financial year, marking the second highest-ever expansion. This is likely to boost banks' earnings, even as deposits have been repriced after the Reserve Bank of India raised interest rates six times in the last year.

"While the upward repricing of the deposit base is likely to lead to a moderation in the interest margin, benign asset quality pressures would support lower credit costs and earnings," the agency said.

Elevated costs of funds and operating expenses can lead to a mild moderation in operating profitability, ICRA said. With credit costs at 1% of advances, banks will be able to withstand a compression of 20–25% in the net interest margin in fiscal 2024.

Retail loans are expected to remain the driver of credit growth. In the last decade, the share of retail loans in bank credit has risen to 32% as of March 31, 2023, from 18% in March 2013.

Asset Quality At Decadal Best

ICRA expects the headline metrics of the banking sector to continue improving, propelled by controlled net additions in non-performing assets and strong credit growth.

Hence, the banks' gross NPAs are likely to decline to 2.8–3% by March 2024 and their net NPAs to 0.8–0.9%. But the impact of macroeconomic shocks on asset quality is something to watch out for.

Net NPAs at public sector banks are expected to be 1–1.1% by March 2024, which is the lowest since June 2009, while those at private banks, at 0.4-0.5%, will be the lowest in more than 15 years. The continued improvement in asset quality rests on the possibility of favourable macroeconomic conditions.