Reports suggest lower bad loans to improve bank profitability

Growth in pre-provision profits and lower bad debts will improve banks’ profitability in the current fiscal year, according to a report on Monday. Improved profitability will offset increases in capital consumption due to an acceleration in loan growth, helping banks across the system to maintain capital at current levels, Moody’s Investors Service said in a report.

Public sector bank (PSB) capital ratios have improved over the past year, helped by government capital injections, he said. “In addition, PSBs along with their private sector counterparts have proactively sought to raise capital through the equity market, taking advantage of improvements in profitability to attract investor interest. Rated private sector banks had a Common Equity Tier 1 (CET1) asset-weighted average of 15.8% at the end of 2021, which positions them well to seize opportunities to increase lending as economic conditions improve,” did he declare.

Read also :

Further improvements in the financial health of PSOs will continue to help them raise equity in the market, thereby reducing their reliance on government capital support. The report further states that “Gradual increases in national interest rates will increase net interest margins because banks will be able to pass higher rates on to borrowers, while their funding costs will increase slightly because banks have reduces the share of term deposits from high-cost companies in total deposits.”

Stable asset quality and existing provisions against old stressed assets will allow banks to reduce loan loss provisions, he said, adding that the return on assets of rated PSBs and private sector banks has increased. significantly at 0.6% and 1.5%, respectively, in the nine months ended December 2021 compared to -0.4% and 0.7% in the year ended March 2018. non-performing loans (NPLs) will decline due to recoveries or write-offs of legacy problem loans while the formation of new NPLs will be steady as the economy recovers, he says.

Loan growth will help lower NPL ratios by expanding the overall pool of loans, although further defaults may arise from loans that have been restructured due to economic disruption from the pandemic, he said. declared. Regarding the economic outlook, the Indian economy is expected to recover over the next 12 to 18 months, with GDP increasing by 9.3% in the year ending March 2022 and 8.4% the following year. .

Improving consumer and business confidence as well as improving domestic demand will support economic growth and credit demand, he said. However, he said, the global economic fallout from the Russian-Ukrainian military conflict will create certain risks, as it fuels inflation due to rising oil prices and falling value of the local currency, which will increase the pressure on the Indian central bank to raise interest rates.

Rising corporate profits and easing funding constraints for non-bank financial corporations, which are large borrowers from banks, will support loan growth, he said, adding that growth in lending is expected to accelerate to 12-13% in FY23 from 5% in FY21. .

Comments are closed.