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Updated: Sep 8, 2019

Sector Report: Banking

Bank credit growth to accelerate to 11-12% over next 2Ys

After growing in single digits for the past three consecutive years, CRISIL Research expects bank credit to accelerate and grow back in double digits in fiscal 2019-20. This will be mainly driven by strong retail credit demand, higher demand from NBFCs/HFCs, increase in working capital requirement (with increase in commodity prices) and recoveries from NCLT referred accounts. However, the capex led credit demand will continue to remain weak in near term. 

Despite improvement, bank credit growth will continue to lag the systemic credit growth dragged by low capitalised PSBs (including 11 PCA PSBs).

Retail and services segments to continue to grow at a strong pace

Retail segment is expected to continue to grow at a strong pace (~19% CAGR over F19-20) led by strong consumer demand and increase in penetration by banks. Within retail, non-housing retail segment will continue to see relatively strong growth, whereas housing credit growth is expected to grow at a steady pace over next 2Ys. Services segment too will witness strong credit growth mainly driven by increase in demand from NBFCs/HFCs. Even though industrial credit growth will witness slight improvement in near term due to increase in working capital requirement, overall industrial credit will still remain anemic and grow in low single digits over next 2Ys.

Asset quality cycle peaked out

Asset quality review (AQR), implementation of Insolvency and Bankruptcy code (IBC) and RBI Feb-12 circular increased the pace of NPA recognition over the past 2Ys. This led to sharp increase in GNPA ratio from 4.3% in fiscal 2015 to 11.3% in fiscal 2018. With much of the stress already recognised, CRISIL Research expects moderation in additional slippages going forward. This coupled with increase in NCLT resolutions and double digit credit growth will help reduce overall GNPA ratio of the banking system over next 2Ys. We expect gross NPA ratio of the banking system to come down to ~10.3% in fiscal 2019 and ~8.3% in fiscal 2020.

Elevated credit costs to keep profitability weak in fiscal 2019

CRISIL Research expects net interest margins to improve by ~15 bps over next two years mainly driven by rising banking sector lending rates.

Elevated credit cost due to low current provision coverage ratio (PCR) will keep the return on assets (RoA) weak in fiscal 2019. Even though private banks will see RoA to normalize in fiscal 2020, CRISIL Research expects PSU Banks to continue to make losses over next two year as they clean up their book and the need to provide more for the stressed accounts.

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