India Ratings & Research (Ind-Ra) expects banking sector credit growth to hit double digits for the first time in eight years supported by demand for loans from companies to support rising capital expenditure.

The Fitch arm expects credit growth to clock 10% in 2022-23 for the first time since 2013-14 when it had hit 14%. It has however, reduced its estimate for the current fiscal ending March 2022 to 8.4% from 8.9%.

“The growth wil be supported by a pick-up in economic activity post 1QFY22, higher government spending on infrastructure and a revival in retail demand,” Ind-Ra said in a note.

The rating agency expects capital expenditure to rise to has to about Rs 7 lakh crore each fiscal 2022 and fiscal 2023 up from Rs 5.5 lakh crore achieved in fiscal 2021 on the back of a demand ramp-up by end-FY22 and a further pick-up in FY23 with an economic recovery.

“Ind-Ra expects leverage to start building in FY23 on account of a revival in capex, increased working capital demand due to a higher output, higher exports and commodity inflation. Ind-Ra also estimates Rs 2 lakh crore of primary investments in focus sectors linked to the performance-linked incentive scheme (such as electronics, textiles, defence, pharma, chemicals and electric vehicles).”

It expects most of this investment to be upfronted in FY22-FY23 so as to maximise the period for which the benefits could be availed by corporates, further boosting secondary investments. “Overall, the bank credit growth to the corporate segment could be around 8% yoy in FY23,” Ind-Ra said.

The agency estimates gross NPAs at 6.3% and stressed assets at 8.7% for FY22 which will further reduce to 6.1% and 7.6%, respectively, for FY23.

As a result of this growth and stable asset quality, the agency has revised the outlook on the overal banking sector to improving for FY23 from stable.

“The banking system’s health is at its best in decades. The improving health trend that began in FY20 is likely to continue into FY23. Furthermore, key financial metrics are likely to continue to show improvement in FY23, backed by strengthened balance sheets and an improving credit demand outlook with an expected commencement of corporate capex cycle,” the agency said.

Though overall asset quality is improving, stress is likely to increase from the retail and micro, smal and medium (MSME) segments which were most impacted in the ongoing pandemic environment.

“The stressed asset ratio (GNPA + restructured) in the retail asset segment is expected to almost double to 5.7% at end-FY22 from 2.9% at end-FY21, whereas for the MSME segment, it could increase to 15.8% from 11.7%. Additions expected from the agri segment would be in line with the trend over the past four years,” Ind-Ra said.

In contrast stressed assets from companies are likely to drop to 10.4% in FY22 from 10.8% in FY21 due to recoveries from a couple of large accounts and ongoing recoveries and upgrades in other smaler corporate accounts. Stress from the MSME segment will continue to rise even in the next fiscal.

“For FY23, the agency expects stressed assets in retail to decline to 4.9% on account of recoveries, to increase further to 16.7% for MSMEs on account of continuing stress in the segment and to decline to 10.3% for corporates on account of a continuing trend of recoveries,” Ind-Ra said.

The agency has a stable outlook on all banks. It expects large private sector banks to continue market share gains due to their superior product and service proposition.

Old private sector banks could face challenges on asset quality due a large proportion of MSME loans in their books, the agency said.

Ind-Ra expects PSU banks to benefit from loan recoveries, considering their highest profitability in the past six years.