Bank credit jumped by 11.5 per cent during FY22. Full-year loan growth for FY23 will witness a modest slowdown from the 17 per cent YoY pace in H1FY23. State-owned banks have lower loss-absorption capacity, with their CET1 ratios significantly lower than those of private banks
Fitch Ratings being global rating agency said that bank credit growth in excess of 13 per cent year-on-year (YoY) in FY23 may put pressure on core equity tier ratios (CET1) of banks, specifically the public sector lenders on 28 November.
In order to absorb potential future losses, it may limit the buffers of Indian banks.
Bank credit jumped by 11.5 per cent during FY22. Full-year loan growth for FY23 will witness a modest slowdown from the 17 per cent YoY pace in H1FY23. The normalisation of economic activity will drive credit offtake. This will be followed by the Covid-19 pandemic and high nominal GDP growth.
The banking system’s CET1 ratio in H1FY23 nearly drop by 50-bps led by rapid loan growth, from 13.4 per cent at end-FY22. Most banks, however, do not factor in quarterly profits as part of their capital calculation, said Fitch in a statement.
CET1 ratios after falling modestly, will sustain around 13 per cent levels until FY24, as banks step up efforts to introduce external capital.
State-owned banks have lower loss-absorption capacity, with their CET1 ratios significantly lower than those of private banks. Their capacity may get destroyed later, if rapid loan growth did not match with fund-raising.
Generally, Indian banks remain open to raising additional capital for the purpose of fund growth, in spite of the rates hike. Private banks are normally better than state-owned banks at capital planning, despite steps to raise fresh equity may sound opportunistic and incremental. This may reduce the risk that they create capital market stress.
According to Fitch, the near-term asset quality risks of Indian banks appear to be contained. The system non-performing loan ratio witnessed a fall to 5.1 per cent in H1FY23 due to low fresh bad loans and loan growth. Credit costs are about 1.0 per cent as against 1.3 per cent in FY22 and provision coverage ratio of 76 per cent in 1HFY23.
Adding to this, th agency said “We expect credit costs to remain around these levels in FY23 as a whole before rising to 1.5% in FY24 with the gradual unwinding of regulatory forbearance on loans affected during the pandemic.”