The health of the Indian banking sector is at its best in decades, according to India Ratings and Research (Ind-Ra).

Revising its outlook on the sector from ‘stable’ to ‘improving’ for FY23, the rating agency said it expects credit growth to pick up 10% and gross non-performing assets (NPAs) staying at 6.1% during the year.

The improving health trend that began in FY20 is likely to continue into FY23, the agency added.

Key financial metrics are likely to continue to show improvement in FY23, backed by strengthened balance sheets and an improving credit demand outlook with an expected commencement of the corporate capex cycle.

The agency’s ‘stable outlook’ on public sector banks (PSBs) for FY23 reflects reasonable capital buffers, low overhang of corporate stress in terms of expected slippages and manageable impact of Covid-19. 

It expects PSBs to look for growth across sectors and benefit from loan recoveries, considering their highest profitability in the past six years. 

In FY22, the rating agency revised the negative outlook to ‘stable’ on long-term issuer ratings on five government-owned banks.

Ind-Ra’s stable outlook on large private banks for FY23 indicates their continued market share gains in both assets and liabilities. Most have strengthened their capital buffers and proactively managed their portfolio. As growth revives, large private banks are likely to witness continuing market share gains due to their superior product and service proposition.

On most old private banks, the agency also has a ‘stable outlook’ for FY23 as they generally have a sticky liability franchise. However, these banks need to invest in technology further to be in the play. Otherwise, they may not be able to offset the pricing benefit that large banks may offer. Nevertheless, their asset quality challenges could be material, given their larger proportion of SME.

While the tightening liquidity would push up interest rates, impacting treasury gains, it would be partially offset in the short term as loans get repriced faster than deposits. Almost one-third of the system's loans are linked to external benchmark rates.

Ind-Ra has marginally revised its credit growth estimates to 8.4% from 8.9% for FY22 and 10% for FY23. The growth will be supported by a pick-up in economic activity post Q1FY22, higher government spending on infrastructure and a revival in retail demand. 

The agency estimates gross NPA at 6.3% and stressed assets at 8.7% for FY22. This is likely to moderate to 6.1% and 7.6%, respectively, for FY23. Provisioning cost for FY22 is expected to be at around 1.5% and 1% in FY23.

The agency said the corporate segment's stressed assets would slightly drop in the ongoing fiscal year to 10.4% from 10.8% in 2020-21 on account of recoveries from a couple of large accounts and ongoing recoveries and upgrades in other smaller corporate accounts. 

For 2022-23, the agency expects stressed assets in retail to decline to 4.9% on account of recoveries. In case of MSMEs, bad assets may increase to 16.7%, and fall to 10.3% in corporate segment on account of a continuing trend of recoveries.