Covid-19 and the disruptions that the pandemic has caused over the last two years has had a huge impact on the micro small and medium enterprises (MSME). As infections decline and the economy rebounds, the overall health of the banking sector is seen improving. But, stressed assets in the MSME and retail banking segments are expected to rise sharply this year ending March 2022.
“Asset quality in the retail and MSME segments are most impacted in the ongoing pandemic environment,” Karan Gupta, director at India Ratings and Research said on Thursday.
The stressed assets ratio (gross non-performing assets and restructured assets) in the MSME segment is seen rising to 15.8 per cent at the end of the current financial year, from 11.7 per cent, a year ago. On the other hand, the stressed assets ratio in the retail segments is expected to almost double in the same period to 5.7 per cent from 2.9 per cent, according to India Ratings.
In the next financial year (2022-23) also, continued stress among MSMEs means the stressed assets ratio in this segment could rise further to 16.7 per cent. However, stressed assets ratio in the retail segment is expected to decline to 4.9 per cent as recoveries increase.
The stressed assets ratio in the corporate segment is also seen declining gradually from 10.8 per cent in 2020-21 to 10.4 per cent this year and 10.3 per cent in 2022-23. This decline will be aided by recoveries from a couple of large accounts and ongoing recoveries and upgrades in smaller corporate accounts, said Gupta.
Overall, the Fitch Group-owned credit ratings agency has revised its outlook on India’s banking sector to “improving” from “stable” stating the banking system’s health “is at its best in decades.”
“Key financial metrics are likely to continue to show improvement in FY23, backed by strengthened balance sheets and an improving credit demand outlook with an expected commencement of corporate capex cycle,” said Gupta in his assessment.
While credit growth in the current financial year has been revised to 8.4 per cent from 8.9 per cent, it is expected to rise to 10 per cent in 2022-23, supported by a pick up in economic activity, higher government spending on infrastructure and revival in retail credit demand.
While, retail credit demand has already been strong, corporate credit demand is also expected to rise as private sector capital expenditure picks up, which will in turn lead to higher borrowings and increased working capital demand, due to higher output, higher exports and commodity inflation.
India Ratings estimates capex would rise to about Rs 7 lakh crore each in 2021-22 and 2022-23, compared with Rs 5.5 lakh crore in 2020-21 as the economic recovery gathers pace. The ratings agency also expects Rs 2 lakh crore of primary investments in sectors linked to the performance-linked incentive scheme announced by the government.
In recent years, the overall capital position of banks has also improved to comfortable levels. As stressed assets fall in 2022-23, the provisioning requirements will also reduce, pointed India Ratings.
Large private sector banks will continue to gain market share in both assets and liabilities as growth revives, due to their “superior product and service proposition,” said India Ratings.