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ICICI Securities Report
The Reserve Bank of India's six-monthly Financial Stability Report reiterates our systemic view that Indian banks' balance sheet strength is strong and is likely to remain so. The report mentions that both banking and corporate sectors' balance sheets have been strengthened, engendering a ‘twin balance sheet advantage' for growth.
The common equity tier and capital-to-risk weighted assets ratio of scheduled commercial banks, as of FY23, are at historical highs of 13.9% and 17.1%, respectively.
Gross non-performing assets have come down to their lowest level in the past 10 years to 3.9% and the base line projections by the RBI indicate further improvement to 3.6% by FY24 end. This goes in line with our thesis of stable to improving gross slippages for the system and benign credit cost during FY23-25.
The report also highlights contained and improving trends on systemic special mention account loans. It gives encouraging picture on three key segments – unsecured retail, micro, small and medium enterprise and Emergency Credit Line Guarantee Scheme portfolio, where the predictability of asset quality outcome is still lower, in our view.
Unsecured retail loans formed only 7.9% of total banking system credit. Its asset quality has improved, with GNPA ratio declining from 3.2% in FY21 to 2.0% in FY23. The SMA 1+2 share has been contained at 1.1% for private banks and 3.1% for public sector banks though SMA 0 share appears bit elevated at 2.9% for private banks and 6.8% for PSBs.
Thus, RBI notes that notwithstanding a few signs of potential stress in retail loans, they do not pose an imminent risk to systemic stability. MSME GNPAs have improved sharply from 9.3% in FY22 to 6.8% with improvement in below Rs 250 million ticket size as well.
On ECLGS, RBI notes total delinquency has been 5.5% of total disbursed amount, which in our view is very comfortable.
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