India Ratings upgrades outlook on banking sector to 'stable' for FY22

India Ratings and Research (In-Ra) has upgraded the outlook on the banking sector from “negative” to “stable” for FY22.

The change in outlook is driven by a reduction in the system-wide Covid-19 linked stress to below the expected levels on back of liquidity support and emergency credit support, especially to micro, small and medium units (MSMEs).

Banks have also strengthened their financials by raising capital and building provision buffers, Indi-Ra said in a statement.

The rating agency has upgraded its FY21 credit growth estimates to 6.9 per cent from 1.8 per cent. The credit is expected to grow at 8.9 per cent in FY22, on the improvement in the economic environment in October 2020-March 2021 (2HFY21) and the government's focus on higher spending, especially on infrastructure.

The agency estimates Gross Non-Performing Assets (GNPAs) of banks to be at 8.8 per cent in FY21. This would move up to 10.1 per cent in FY22. Stressed assets (GNPAs plus restructured loans) would be at 10.9%. The provisioning cost has fallen from its earlier estimate of 2.3 per cent for FY21 to 2.1 per cent (including Covid-19 linked provisions) and is estimated at 1.5 per cent for FY22.

It revised the outlook on public sector banks (PSBs) to 'stable' for FY22 from 'negative'. The regulatory changes led to an improvement in PSB's ability to raise AT I capital. Also, a high provision cover on legacy bad loans, overall systemic support resulting in lower-than-expected Covid-19 stress, and minimal surprises arising out of amalgamation of PSBs worked to the benefit of PSBs.

The fact that the government has earmarked Rs 34,500 crore for infusion into PSBs in Q4FY22 should suffice for their near-term growth needs, Indi-Ra added.

The agency maintained 'stable' outlook for private banks. They continue to gain market share, both in assets and liabilities, while competing intensely with PSBs. Most have strengthened their capital buffers and proactively managed their portfolio.

As growth revives, large private banks would benefit from credit migration due to their superior product and service proposition, it added.

Ind-Ra estimates that about 1.24 per cent of the total bank book is under incremental proforma NPA and about 1.75 per cent of the total book could be restructured by end-FY21.  As a conservative measure, the agency has not adjusted for overlaps between those categories. This is the incremental stress purely on account of the Covid-19 pandemic and does not include the slippages that banks would witness in the normal course of business.

The overall stressed assets (GNPA + restructured) could see rise in retail segment. The stock of stressed retail assets for PSBs could increase to 2.9 per cent in FY22 from 2.1 per cent in FY21, while it could increase from 1.2 per cent to 4.3 per cent for private banks.