Net NPAs on course to fall to decadal best this fiscal: Report

The trend of improving asset quality will continue with headline gross non-performing advances and net bad loans declining to their best level in over a decade, at 2.63 per cent and 0.83 per cent this fiscal from 3.96 per cent and 0.97 per cent, respectively, in fiscal 2023. At the same time, the gross fresh NPA generation rate of 2 per cent will be the lowest level since fiscal 2012, Alka Anbarasu, an associate managing director at Moody's and Karthik Srinivasan, a senior vice-president at Icra, told reporters.

While the year-on-year credit growth is likely to moderate with higher interest rates, the incremental credit growth is expected to be Rs 15-16 lakh crore, which is poised to become the banking sector's second-highest increase on record, they said.

Explaining the rationale for their optimism, they said credit conditions have gradually improved, with a significant reduction in the banks' stock of legacy NPA over the past three years. On the other hand, corporates' financial health has also improved following a decade of deleveraging. And stress among non-bank financial institutions has also abated.

"While banks globally are facing liquidity pressures amid tighter monetary policy, outflows of excess liquidity built up during the pandemic into more profitable investments and increased risk aversion among investors because of stress in the US banking sector, domestic banks, on the other hand, have strong funding franchises and ample liquidity to support growth in their loans in line with strong economic conditions," said Anbarasu.

Another enabler is the recapitalisation of banks following capital raisings from the equity market as well as capital infusions from the government for public sector banks. She expects the average return on tangible assets for banks to hold steady at 1-1.2 per cent over the next two years, which will support asset growth of around 15 per cent while keeping capital at current levels.

With deleveraged balance sheets, corporates' asset quality remains strong, which, coupled with the stable performance of the retail asset quality, will help to reduce fresh slippages in the asset quality of banks, said Srinivasan.

They also see the credit cost to moderate with rising asset quality, which in turn will translate to a steady return on assets and return on equity for banks at 1.1 per cent and 13.1 per cent, respectively, in the current fiscal.

On the other hand, private sector banks will continue to have higher RoA and RoE at 1.6 per cent and 14 per cent, respectively, in fiscal 2024. Public banks will report their best RoE since fiscal 2013 at 13.4 per cent, inching closer to that of the private banks.

When it comes to India Inc, the agencies expect the credit quality to remain strong on the back of relatively higher economic growth, supportive government policies and investments in large infrastructure projects.

The report also expects private and government capex to surge amid the large size of new projects, improving capacity utilization levels, production-linked incentive (PLI) schemes and government initiatives toward clean energy.

While higher inflation will cause profitability to weaken, especially for sectors that are not able to pass on the increased cost, relatively strong economic growth will limit the earnings decline for corporates. This, combined with debt reduction over the past two-three years will keep credit metrics relatively well-positioned for their respective ratings, said Vikash Halan, an associate managing director at Moody's.