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Lenders may see uptick in credit growth, better asset quality in Q4, say analysts

Normalised collection efficiency will lead to higher recoveries and upgrades and higher credit growth shall further improve lenders’ headline gross non-performing asset figures, analysts say.

April 14, 2022 / 06:56 PM IST

Banks and non-banking financial companies (NBFCs) are likely to post higher credit growth and improvement in asset quality in Q4FY22 after seeing muted demand and a rise in slippages due to Covid-19-led disruptions for multiple quarters, analysts said.

They are of the view that credit growth is returning to pre-Covid levels. As per the latest data from the Reserve Bank of India (RBI), for the fortnight ended March 25, banks posted loan growth of 9.6 percent on a yearly basis, which is likely the highest in three years.

Private sector banks are leading the credit growth chart. According to Anil Gupta, vice-president and co-group head at ICRA, private banks will likely post upwards of 15 percent year-on-year rise in their loan books while state-owned lenders will report 8-9 percent credit growth.

Credit from banks to NBFCs will drive banks’ credit growth during the quarter ended March. Infrastructure, power, road, telecom, and micro, small and medium enterprises (MSMEs) are other sectors where banks will likely post higher loan growth during the reporting quarter.

Large industries, where incremental credit growth was negative in FY22, have now turned positive and the outlook for FY23 is positive too as rise in commodity prices may drive up working capital requirements of corporates, analysts said.


State Bank of India (SBI) chairman Dinesh Khara shares a similar view. Speaking to CNBC-TV 18 on April 13, Khara said SBI will likely post over 10 percent credit growth in FY22 and an even better figure in FY23.

“Going forward, as of now, we are seeing some kind of better capacity utilisation in terms of the working capital utilisation and term-loan offtake. This is a trend we observed towards the end of the last quarter (Q4FY22) and also it is likely to persist going forward,” Khara said.

Analysts are upbeat about banks’ asset quality, saying fresh slippages will be in line with the previous quarter or moderately lower.

Normalised collection efficiency will lead to higher recoveries and upgrades and higher credit growth shall further improve lenders’ headline gross non-performing asset figures, they add.

“On asset quality and collections, Q4FY22 should see banks doing good on this and further with loan growth expected to show an uptick, GNPA (gross non-performing asset) numbers should look better. Movement in asset quality of the restructured and ECLGS (emergency credit line guarantee scheme) portfolios is a key monitorable, though,” said Karan Gupta, director of financial institutions at India Ratings and Research.

While the performance of restructured loans will be a key monitorable, there is also a possibility of banks marking their exposure to Future Group companies as non-performing during Q4, and the same needs to be looked out for during the earnings, analysts said.

Further, a fall in banks’ treasury income along with higher operating expenses will continue to impact their bottom line in Q4FY22.

“There will be some issues with respect to profitability due to bond yields. Yields have been on a rising trend. The trading profit of banks, which was substantial, contributing close to Rs 10,000 crore on a quarterly basis, will likely go down to less than Rs 1,000- 2,000 crore,” said Gupta.

On an overall basis, however, banks should report a better net profit in January-March than the previous quarter, he added.


With normalised collections and rise in credit demand, most analysts expect NBFCs to post higher profits in Q4FY22.

A.M. Karthik, vice president and sector head of financial sector ratings at ICRA, said the assets under management (AUM) of NBFCs are expected to grow between 6 percent and 9 percent in FY22. The growth during April-December is estimated at 5 percent and, therefore, in Q4, sequential growth could be about 2-4 percent, he said.

NBFCs’ credit growth will mostly be driven by rising infrastructure sector loans and products such as home loans, gold loans, unsecured personal and consumer finance loans, and microfinance advances.

As the applicability of the RBI’s November 12 circular on asset up-gradation is deferred to H2FY23, the incremental impact of the circular is expected to be very modest on non-banks in January-March, Karthik said.

“Entities that have already aligned their financial reporting to the November 12 circular are expected to continue with the same. However, the incremental negative impact is expected to be very low. Overall, with a steady improvement in the operating environment for most asset segments, we expect the NBFC gross stage 3 to come down by about 40 basis points in March 2022 vis a vis  December 2021 levels,” he added.

As of December end, around 3 percent of the outstanding loans of non-banks, excluding infrastructure-focused NBFCs, was restructured and need to be monitored, analysts said.

Among various asset segments, the commercial vehicle (CV) segment witnessed higher restructuring and, thus, downside risks emanating from fuel prices remain a key risk factor for CV operators in the near term.

Brokerage ICICI Securities said NBFCs’ margins may gain support from the lower cost of funds but it will be partially offset by lower yields that non-bank lenders are gaining on advances in order to compete with peers.

“We estimate most NBFCs/HFCs (housing finance companies) will exhibit operational efficiencies in Q4FY22 as well. Overall, we are estimating earnings to rise 18% (year-on-year) and 4% QoQ (quarter-on-quarter) for asset financiers under our coverage, while housing financiers are expected to report growth of 18% YoY and 4% QoQ for Q4FY22,” ICICI Securities said in a pre-earnings note.

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Piyush Shukla
first published: Apr 14, 2022 06:56 pm
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