Investment Information and Credit Rating (Icra) maintains a positive outlook for the banking sector, anticipating strong credit growth to drive earnings growth. While deposit repricing may impact interest margins, favourable asset quality conditions should lead to lower credit costs and increased earnings. The banking sector is expected to generate sufficient internal capital to support growth and improve capital reserves. Credit growth, primarily in the retail segment, remains robust, but its sustainability relies on favorable macroeconomic conditions.
Anil Gupta, Senior Vice President & Co-Group Head at Icra, noted, "Credit growth remains strong, and FY2024 is expected to see significant incremental credit expansion, second only to last year's record level."
Icra predicts that key banking sector metrics will continue to improve due to controlled non-performing advances and robust credit growth. Gross NPAs and net NPAs are expected to decline by March 2024 to 2.8-3.0 per cent and 0.8-0.9 per cent, respectively, from 3.96 per cent and 0.97 per cent as of 31 March 2023, marking the best levels in over a decade. However, Icra remains cautious about potential asset quality impacts from macroeconomic shocks.
Credit costs are estimated to remain at 1.0 per cent of advances in FY2024, allowing banks to withstand a slight compression in interest margins and maintain a healthy return on assets (RoA). Capitalisation and solvency profiles of private and public sector banks are expected to remain comfortable, with Tier-I capital projected at 14.6-14.7 per cent and improved solvency levels by March 2024.
Over the past decade, retail credit growth has been a significant driver of overall credit expansion. Despite challenging economic conditions, the retail segment has shown resilience. However, concerns exist regarding potential stress on borrowers' debt-servicing abilities in adverse macroeconomic conditions.
Anil emphasised that while the retail segment has performed well, the banking sector should remain vigilant about potential impacts on asset quality, given changing macroeconomic conditions. Nevertheless, banks are currently in a strong position with healthy operating profits and capital reserves to navigate such scenarios.