“We anticipate weak banking sector credit to fall to 5-5.5 per cent of gross credit by March 31, 2024. Similarly, we expect credit cost to stabilize at 1.5 per cent and normalize to 1.3 per cent for FY2023. estimates, thereby reducing credit costs and India“Average of 15 years,” the rating agency said in a report.
The agency said the small and medium-sized enterprise sector and low-income households are vulnerable to rising interest rates and high inflation, but these risks are expected to be limited.
With the economic boom, the residual stress for these segments should start to ease, adding that NPL Recovery is also likely to accelerate.
It also said that India’s economic growth prospects should remain strong in the medium term, with GDP growing 6.5-7 per cent annually in fiscal year 2024-2026.
The economy’s long-term high growth rate versus peers highlights its historical resilience. India’s wide range of structural trends, including healthy demographics and competitive unit labor costs, work in its favour, it noted.
In addition, it is stated that the government will continue to support this system and it is highly likely that the government will continue to support the public sector banks despite plans to privatize two such banks.
Over the next few years, the report said, credit growth to remain somewhat in line with the trajectory of nominal GDP, and credit growth to the retail sector to continue to outperform the corporate sector.
Corporate borrowing is also picking up pace, with both working capital requirements and growth driving demand related to capital expenditure, the company said.
Still, if risk management does not improve, the ensuing growth cycle could spawn a new crop of sour loans, the agency said.
Lower credit costs and faster credit growth should sustain the turnaround in banks’ earnings, it said.
Improvement in profitability should lead to increased capital formation. Capitalization has increased over the years due to raising of capital of banks and infusion of government capital in public sector banks.
S&P Global said the capital ratios for India’s large private sector banks are on par with international counterparts, although they are lower for public sector banks.