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Banks adequately capitalised, but higher credit growth could see fund-raising: CRISIL’s Krishnan Sitaraman

Rating agency’s senior director and deputy chief ratings officer expects banks’ credit growth to pick up to 11-12 percent in FY23. CRISIL may also look at revising this forecast upwards, he said

August 26, 2022 / 03:08 PM IST

Banks are currently well-placed in terms of capital, but expectations of high credit growth could prompt further fund-raising this fiscal year, Krishnan Sitaraman, senior director and deputy chief ratings officer, CRISIL Ratings, said.

“Banks’ capitalisation levels are currently adequate, but they are also preparing for high credit growth. This means they would look at capital-raising for the future,” Sitaraman told Moneycontrol in an interview. “Both public and private sector banks may look to raise capital.”

Sitaraman added that domestic and foreign investors seem to be having an appetite for bank capital now. To take advantage of this trend, banks’ capital-raising should be both on the equity side as well as Tier 1 and Tier 2 bonds, he said.

He expects banks’ credit growth to pick up to 11-12 percent in FY23. The rating agency may also look at revising it upwards as “we are seeing a decent traction in credit growth on a year-on-year basis”, he said.

Capital acts as a buffer in times of a crisis or poor performance by a bank. Sufficiency of capital also instils depositors' confidence in the bank and prevents systemic risks. Banks are just about recovering from COVID-19 and the ensuing lockdowns that rendered millions of Indians jobless. That impacted banks’ asset quality and led to an increase in slippages.


Also read: Capital ratios of state-run banks adequate to absorb shocks, boost credit growth, say experts

Not just the government, the Reserve Bank of India (RBI) has also been very particular that banks maintain a certain level of capital on their balance sheets. According to the RBI, scheduled commercial banks (SCBs) are required to maintain a minimum Capital to Risk-Weighted Assets Ratio (CRAR) of 9 percent on an ongoing basis.

This ratio measures a bank's financial strength by using its capital and assets. The capital funds, according to the RBI, shall consist of the sum of Tier I capital and Tier II capital.

Public sector banks alone raised Rs 32,293 crore in FY20, Rs 58,697 crore in FY21, and Rs 50,719 crore in FY22, Minister of State for Finance Bhagwat Karad had said in Parliament on July 26.

‘Fortunes on an uptrend’

Post the pandemic, Sitaraman said that banks’ “fortunes are on an uptrend” mainly because non-performing assets (NPAs) have peaked and profitability is expected to improve on the back of rising interest rates.

“I think, in FY23, banks will be able to benefit from their improvement or recovery from the pandemic,” Sitaraman said. “We expect profitability of banks to actually improve this fiscal, because in a rising interest-rate scenario, bank profitability improves.”

The RBI -led Monetary Policy Committee (MPC) has raised the benchmark repo rate by 140 basis points since May to control inflationary pressures in the economy. Most banks’ loan book is largely floating rate-linked and gets re-priced upwards, quicker than their deposits. This helps in maintaining net interest margins.

However, the flip side of higher interests is that banks have had to bear the brunt of high mark-to-market losses due to a jump in bond yields. Consequently, banks’ treasury income took a hit in the April-June quarter. However, that too seems behind us, given that the pace of rate hikes by RBI may slow, said Sitaraman.

“While interest rates may still go up here on, the extent of such rate hikes may not be very substantial,” he said. “Any incremental hit on the treasury book should be lower than what has been already taken for most entities.”

‘Bulk of NPAs behind us’

Another factor contributing to banks’ improved financial health is the reduction of NPAs, said Sitaraman. The gross non-performing asset (GNPA) ratio of SCBs declined to a six-year low of 5.9 percent in March 2022 from 7.4 percent in March 2021, the RBI said in its Financial Stability Report released on June 30.

The net non-performing asset (NNPA) ratio also fell by 70 basis points during FY22 and stood at 1.7 percent as on March-end.

“Gross NPAs are expected to further decline in FY23,” Sitaraman said. “Slippage levels, which had risen to 6-7 percent a few years ago, have now come down to the 3 percent levels and should come down further in the near term.”

Sitaraman does not expect any major slippages from large corporate books since most of these NPAs have reduced their leverage and have stronger credit profiles. MSME slippages, however, may stay elevated, given their delayed recovery, while retail NPAs should be steady.

He elaborated that banks’ underwriting processes have improved and there is greater use of data analysis and credit bureaus and better understanding of borrowers’ credit history. All of these give a higher degree of comfort on the asset quality front. Structurally, banks are better placed than they were a decade ago to handle unsecured loans, he added.

Also read: Banks step up credit card play ahead of festive season

‘Co-lending to pick up’

Similar to banks, Sitaraman said that non-banking finance companies (NBFCs) are also likely to witness an uptrend, going forward. NBFCs’ asset quality is improving, which will support better credit growth, while off-balance sheet growth will also pick up, he said.

“Aspects like securitisation, assignments and co-lending should pick up and there will be greater partnership between NBFCs and banks,” Sitaraman said.

Co-lending or co-origination is a set-up where banks and non-banks enter into an arrangement for the joint contribution of credit for priority sector lending. Under this arrangement, both banks and NBFCs share the risk in a ratio of 80:20 (80 percent of the loan with the bank and a minimum of 20 percent with non-banks).

CRISIL is expecting a double-digit credit growth for NBFCs in FY23. Growth in Assets Under Management (AUM) should touch double digits this fiscal, which will be a four-year high.

CRISIL has a ‘stable’ outlook on the banking and NBFC sectors.

“If any entity (NBFC) brings in a large amount of capital with the sustenance of a strong profitability, we could look at an upgrade,” he added.
Siddhi Nayak is correspondent at
first published: Aug 26, 2022 03:08 pm
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