Reduction in non-performing loans to improve bank profitability: Moody’s report


The trend should help offset the increase in capital consumption due to faster credit growth

The trend should help offset the increase in capital consumption due to faster credit growth

Growth in earnings before provisions and a decline in non-performing loans will improve banks’ profitability in the current fiscal year, a report said on Monday.

Better profitability will offset increases in capital consumption due to accelerated credit growth and help banks across the system maintain capital at current levels, Moody’s Investors Service said in a report.

The capital ratios of public sector banks (PSBs) have improved over the past year, helped by government capital injections, it said.

“Additionally, public sector financial institutions, as well as their private sector peers, have been proactive in trying to raise capital from the equity market, using profitability improvements to attract investor interest ) ratio of 15.8% by the end of 2021, positioning them well to seize credit growth opportunities as economic conditions improve,” it said.

Further improvements in PSB’s financial health will continue to help them raise equity from the market and reduce their reliance on government capital support, it said.

The report went on to say that gradual hikes in domestic interest rates will increase net interest margins as banks will be able to pass higher interest rates on to borrowers, while their funding costs will increase marginally as banks reduce the share of high-priced corporate term deposits overall have reduced deposits.

Stable asset quality and legacy provisions will allow banks to reduce loan loss provisions, it said, adding that the return on assets of rated PSBs and private sector banks has increased significantly over the nine-year period, to 0.6% and 0.6%, respectively. Up 1.5% for the months ended December 2021 from -0.4% and 0.7% for the year ended March 2018.

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

The loan growth will help lower NPL ratios by expanding the overall pool of loans, although new defaults could arise from loans that have been restructured due to economic disruptions from the pandemic, it said.

Regarding the economic outlook, India’s economy is expected to recover over the next 12 to 18 months, with GDP growing at 9.3 percent in the year to March 2022 and at 8.4 percent in the following year.

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

However, 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 lowers the value of the local currency, which will increase pressure on the Indian central bank on interest rates.

Rising corporate earnings and easing funding restrictions on non-bank financial firms, which are major borrowers from banks, will support credit growth, she said, adding that credit growth is expected to accelerate to 12-13% in FY23 from 5% in FY21 become.

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