 "Banks credit growth")
After a robust 15.9 per cent growth last financial year on the back of a broad-based economic recovery, stronger balance sheets and a lower base of the preceding two financial years, bank credit growth is likely to moderate to 13-13.5 per cent in 2023-24 (FY24) and improve a tad to 13.5-14 per cent in FY25 as capital expenditure (capex) levels pick up.
Asset quality trends remain benign, with gross non-performing assets (GNPAs) expected at 3 per cent in FY24, down from 3.9 per cent in the last financial year. The corporate segment is likely to see continued improvement, with GNPA expected to fall below 2 per cent this financial year from a peak of 16 per cent as on March 31, 2018. GNPA in the retail segment could see an uptick of 20-25 basis points (bps) this financial year from a multi-year low of 1.4 per cent on March 31, 2023, driven by unsecured lending segments such as personal loans and credit cards.
In terms of profitability, the improvement in asset quality and high existing provisioning coverage ratio (PCR) helped reduce incremental credit costs, thereby enhancing the return on assets (RoA) to 1.1 per cent in financial year 2023.
CRISIL Ratings expects net interest margin (NIM) to decrease 10-20 bps to 3.0-3.1 per cent this financial year as deposit rate hikes play out. However, lower credit cost will provide an offsetting tailwind on account of continued benign asset quality and already strong PCR, resulting in steady RoA levels.
From a capitalisation perspective, the banking sector has adequate buffers and is well placed for growth over the medium term.
While most private banks have traditionally maintained comfortable buffers, many are also benefiting from capital raised during the past three financial years. Public sector banks (PSBs), too, have raised some equity, apart from the substantial capital infusion by the government in the past few financial years, and have stronger balance sheets and capital ratios. From a funding perspective, it is important that deposit growth does not lag too far behind.
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The differential between credit growth and deposit growth is likely to narrow to 200–300 bps from 500 bps in financial year 2023 as deposit rates continue to inch up.
Competition for deposits among banks will be par for the course. Banks are likely to walk the tightrope between deposit growth and protecting margins, depending on their ability to mobilise cost-effective deposits.
NBFC AUM to grow 14-17% next financial year; asset quality to remain under control
AUMs of non-banking financial companies (NBFCs) are set to log a healthy 14-17 per cent growth next financial year on the back of continued strong credit demand across retail loan segments. Growth may be moderately lower than the 16-18 per cent expected in the current financial year as unsecured retail loans, the fastest growing segment in the NBFC AUM pie so far, are likely to see relatively slower growth. This comes as NBFCs recalibrate their strategies due to the recent regulatory measures issued by the Reserve Bank of India (RBI). Against the backdrop of regulatory changes, product diversification is likely to remain a key strategy for NBFCs.
Around 55 per cent of NBFCs added new product offerings in the past four years. The recent regulatory measures to increase risk weights on bank funding to NBFCs have made funding diversification also a key imperative. To ensure stable and consistent access to funds, NBFCs are expected to tap alternative resource mobilisation avenues like securitisation and debt capital markets. CRISIL Ratings has already noted an increase in unique issuers tapping both the markets.
Asset quality metrics remain benign so far. A CRISIL Ratings analysis of early bucket delinquencies and static pools also indicates asset quality is under control in most segments. At the same time, unsecured loans, especially in lower ticket sizes, remain on watch.
NBFC balance sheets are relatively stronger compared with the past few years, supported by higher capitalisation and provisioning buffers. This should stand them in good stead to focus on calibrated growth in the near-to-medium term.
While borrowing costs for NBFCs are expected to go up somewhat due to banks raising lending rates consequent to the regulator increasing its risk weights, it will have little impact on profitability given a partial offset from reducing credit costs.
From a long-term perspective, CRISIL Ratings believes partnership models are here to stay.
NBFCs will adopt more dynamic business and asset-light operating models. They include a combination of on-balance-sheet lending, co-lending, securitisation and direct assignments as they foray into newer segments.
