The banking sector seems to be well placed to deal with a likely double-digit credit growth cycle, say analysts. With the problem of asset quality receding in the past few quarters, things are looking up for the sector.
The sector has cleaned up its books significantly. And the cycle of non-performing assets accumulated over the years that had restricted their ability to lend aggressively seems to be behind them.
More encouraging is that even the bad debts incurred due to the Covid-19 pandemic have been written off and adequate provisioning has been done, says a banking analyst at a domestic brokerage said.
The underwriting measures have improved across banks in the last two years and will hold them in good stead in a strong credit growth cycle, wherein asset quality risks are present.
“In the past few years, bad loans that came from the corporate sector had ballooned. However, with the Insolvency and Bankruptcy Code, the situation on the ground has improved,” Sanjay Kumar Agarwal, senior director, CareEdge, said.
“On the ground, banks have changed processes and made improvements in their systems (underwriting). Many public sector banks have merged, thereby creating bigger and stronger balance sheets. And their asset quality challenges do not seem to be there now,” added Agarwal.
At a recent event, State Bank of India (SBI) chairman Dinesh Khara said that the banking sector will not find it challenging to continue growing their credit book at the current pace, as long as the risk is understood and well priced.
Bank loans rose nearly 17% year-on-year (y-o-y) in the fortnight ended November 4, latest data from the Reserve Bank of India (RBI) showed.
Going ahead, credit rating agency Crisil pegs credit growth at 15% y-o-y in both 2022-23 (April-March) and 2023-24, led by a recovery in the broader economy after Covid-19 related disruptions and the cleaner balance sheets of lenders. This will enable them to expand their loan book.
A significant part of loan growth will continue to be driven by retail loans, while the corporate loan cycle will gather steam from 2023-24 onwards.
Nevertheless, the asset quality risks on banks will be limited as most companies are now reasonably deleveraged in comparison to previous years, say experts.
“Most portfolios (corporate loan) have actually been provisioned out in the last 3-4 years. So, incremental slippages from this portfolio may not be very high as we go ahead,” Pralay Mondal, managing director and chief executive officer, CSB Bank, said.
“We had a very poor seven-eight years between 2012 and 2019. We are not going back there,” added Mondal.