Decline in bad loans to improve profitability of banks: Moody’s report

Trend likely to help offset the rise in capital consumption due to faster loan growth

Trend likely to help offset the rise in capital consumption due to faster loan growth

Growth in earnings before provisioning and the decline in bad loans will improve bank profitability in the current fiscal year, a report said on Monday.

Improved profitability offsets the increase in capital consumption due to an acceleration in credit growth, allowing banks across the system to keep their capital at current levels, Moody’s Investors Service said in a report.

Capital ratios at Public Sector Banks (PSBs) have improved over the past year, aided by government capital injections, it said.

In addition, both PSBs and their private sector peers have proactively sought to raise capital from the equity market, leveraging profitability improvements to attract investor interest. end of 2021, putting them well positioned to seize opportunities to grow lending as economic conditions improve,” it said.

Further improvements in the financial health of PSBs will continue to help them pull equity out of the market, making them less dependent on government capital support.

The report went on to say that gradual increases in domestic interest rates will increase net interest margins as banks can pass higher rates on to borrowers, while their borrowing costs will rise marginally as banks have reduced the share of expensive corporate term deposits in total deposits.

The stable asset quality and existing provisions against legacy stressed assets allow banks to reduce loan loss provisions. months ending December 2021 of -0.4% and 0.7% in the fiscal year ending March 2018.

Non-performing loan (NPL) ratios will fall as a result of recoveries or write-offs of old problem loans, while the formation of new NPLs will be stable as the economy recovers, it said.

Loan growth will help lower NPL ratios by expanding the total pool of loans, even though new defaults could result from loans restructured as a result of economic disruptions from the pandemic, it said.

Turning to the economic outlook, it said the Indian economy is expected to recover in the next 12-18 months, with GDP growing by 9.3% in the year ending March 2022 and 8.4% in the next. year.

Improving consumer and business confidence and improving domestic demand will support economic growth and credit demand.

However, it said the global economic fallout from the military conflict between Russia and Ukraine will pose some risks as it fuels inflation due to rising oil prices and depreciates the value of local currencies, putting pressure on the central bank. of India will increase to interest rates.

Increasing corporate profits and easing funding restrictions for non-bank finance companies, which are significant borrowers from banks, will support credit growth, it said, adding that credit growth is expected to accelerate to 12-13% in FY23, from 5% in FY21.

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