ICRA Sees Healthy Bank Credit Growth Through FY24

ICRA Ltd. upgraded the outlook on the Indian banking sector to "positive" from "stable", citing healthy loan growth through the next fiscal.

Banks are likely to experience healthy credit growth in FY23 and FY24, driving their net interest margins, but their margins may compress due to the rising cost of deposits, according to ICRA. If banks are unable to adequately pass on this cost, then it could emerge as a key risk factor.

"While the persistence of tight liquidity may slow credit growth in FY24, we still believe credit expansion should remain meaningfully strong," said Aashay Choksey, sector head of financial sector ratings at ICRA, during a webinar on Dec. 19.

The Indian banking sector may see incremental credit growth of 15.2–16.1% year-on-year in FY23, followed by 11–11.6% credit growth in FY24, according to ICRA. Deposits, on the other hand, are expected to grow by 8.5–9.1% and 7.3–7.8% year-on-year in FY23 and FY24, respectively, it said.

"With this, the system-level credit-deposit ratio is expected to rise back to pre-Covid levels," Choksey said.

ICRA expects the gross non-performing assets of the banking sector to decline by 140 basis points year-on-year by March 2023, to 4.6%. They are further expected to decline to 4.1% by March 2024.

System-level stress should continue to moderate from current levels, Choksey said. "The restructured book for the banking sector will exit moratorium entirely during FY24, although we believe 60–70% of it has already exited moratorium so far," he added.

Although some banks may require additional provisions to deal with sour loans after they exit moratoria, the incremental requirement is likely to be manageable, Choksey said.

The public sector has dominated the positive rating actions ICRA has taken since FY22. Given the sustained good performance by these banks, it is also likely that the government will not be required to infuse capital in public banks in FY24, according to ICRA. FY23 was the first year in the last decade that the government did not have to budget for bank recapitalisation.

ICRA expects all public sector banks to be self-sufficient for capital requirements as an improved earnings outlook has driven up investor appetite. The rating agency also expects that IDFC First and Axis Bank may require growth capital, but raising it should not present a challenge.