MUMBAI: Rating agency Icra has revised upwards its projection for incremental bank credit growth this fiscal to Rs 19.5-21 trillion or 10.7–11.5 percent more over the past fiscal, and from Rs 19-20.5 trillion or 10.4-11.3 percent earlier, on the bank of improved demand post-GST rate cuts and liquidity boost from CRR cuts, with retail and MSME segments leading growth.
The rating also expects the net interest margin (NIM) to improve in the second half after bottoming out in the first half as deposit repricing is almost over.
On the impact of the slew of regulatory reforms underway, the analysts at the agency told reporters on Wednesday that the shift to an expected credit loss framework is estimated to impact core capital ratios by less than 150 bps, with a long transition period until 2031.
However, they expect the asset quality, which has been on the mend for long now, to be marginally hit with gross NPAs inching up 2.1-2.3 percent, leading to a marginal increase in credit costs.
All this has the agency maintaining a stable outlook for the banking sector this fiscal.
While the banks remain cautious in lending to non-banking financial companies and the corporate demand is yet to see any meaningful revival, the growth is expected to be driven by the retail and micro, small and medium enterprise segments, the agency said, adding the analysis is based on 14 public sector banks including IDBI and 19 private sector ones.
The episodic shift of credit demand from large well-rated borrowers from capital markets to banks and vice versa remains opportunistic and sustainability of that remains to be seen, given the expectations of another rate cut by the monetary policy committee.
The agency forecasts a stable trajectory for FY6 for the banking sector, as they navigate growth revival, amid evolving asset quality and significant regulatory changes.
According to Sachin Sachdeva, a vice-president & sector head at the agency, the first half of the current fiscal has seen incremental credit offtake of Rs 10.1 trillion with a sizeable credit expansion taking place in September, prompting us to revise upwards our full year credit offtake projection.
The robust offtake in H1 was driven by partial frontloading of demand from Q3 to Q2 FY2 given the early onset of the festive season, supported by GST cuts. As a result, the incremental credit offtake in H2 at Rs 9.4-10.9 trillion is seen as flattish relative to the level in H1, and 9% higher than the level in H2 FY25 (Rs 9.3 trillion), he said.
On the regulatory front, the sector remains active with several changes being introduced by the Reserve Bank including two pivotal draft frameworks, namely the capital charge for credit risk–standardised approach’ and the ‘expected credit loss framework’. These proposals, according to him when implemented, are poised to reshape the capital and provisioning norms for the banks. According to him, these collectively signal a significant evolution in risk management, capital allocation, and resilience for the sector.
“Banks are well positioned to absorb the impact of these changes related to capital charge for credit risk and the ECL with resilient capital buffers. The proposed ECL approach is anticipated to increase the provisioning requirements. However, the proposed reductions in risk weights for certain corporate and MSME exposures are expected to benefit capital ratios, except for commercial realty exposures, which will see increased risk weights.
“Nevertheless, the overall impact on core capital ratios is estimated to be below 150 bps because of ECL changes, which will be partially moderated by a favourable impact on account of capital charge. Further, with the transition path up to March 2031, the capital profile is expected to remain comfortable,” Sachdeva said.
On the asset quality front, he said there have been a slight uptick in fresh non-performing advances generation rate in Q1, particularly among private banks due to higher unsecured retail and MSME advances, although the same declined in Q2. Barring the reversion seen in Q2, the overall asset quality trends remain monitorable amid broader macroeconomic developments and the fresh NPA generation rate for full fiscal is expected to be slightly higher than that seen in FY25.
“Consequently, gross NPAs are seen rising slightly in FY26, but will stay within a comfortable 2.1–2.3 percent range. This will translate into a slight increase in credit costs to 0.7 percent up from 0.6 percent seen in the recent past,” he said.
“Our outlook for banks remains stable, with no significant capital requirements anticipated. Both public and private sector banks are expected to maintain comfortable asset quality metrics, though a slight rise in credit cost is anticipated in H2. The NIMs appear to have bottomed out in H1 and a slight recovery is anticipated in H2, as NIM compression is likely to trend marginally lower in 1.2-1.3 percent the range compared to 1.3 percent in FY25”, he added.