Bank credit is expected to grow by up to double digit levels on FY’23 as large corporates come back to banks among rising yields in addition to a pick-up in demand from retail and MSMEs, but credit quality could come under pressure to war related issues and also as moratorium ends, according to ratings firm Icra.

Bank credit could rise by upto 8.9-10.2 percent in FY’2023 compared to an estimated 8.3 percent for FY’2022and 5.5 percent in FY2021 as credit provisions according to Icra. The ratings agency has said that banking credit growth would come from non-food segment credit growth which continues to be driven by retail and MSME segments; and partially by co-lending arrangements with non-banking finance companies (NBFC)s, in its latest research note on the financial sector.

Wholesale credit growth would be supported by demand shift from debt capital market to bank credit, in a rising yield scenario as was seen in FY’2019 Icra said and it expects outlook for banks to be ‘Stable’ in FY2023, based on continued improvement in earnings driven by improved credit growth.

Treasury income is expected to decline during the current fiscal in a rising bond yield scenario. Yet, the return on assets (RoA) is estimated to improve, supported by improved credit growth and decline in credit provisioning as legacy net stressed assets continue to decline.

But there are challenge as restructured loan books exit moratorium as also the macro challenges of the Russia- Ukraine war. “For the sector, challenges emanate from performance of restructured loan book which poses uncertainty to asset quality as these loans exit moratorium” said Anil Gupta, vice president, Icra.” Also, Russia-Ukraine conflict poses macro-economic challenges related to cost inflation, higher interest rates and exchange rate volatility, this could pressurise asset quality. Elevated level of overdue loans in retail and MSME segments post-Covid also remain a concern.”

In terms of asset quality, the gross non-performing advances are expected to decline to 5.6-5.7 percent by March 2023 as against estimate of 6.2-6.3 percent by March 2022. Credit and other provisions are estimated to decline to 1.3-1.4 percent of advances in FY’2023 as against estimated 1.7-1.8 percent in FY’2022. But deposit growth it is expected to slowdown to 7.3-7.9 percent in FY’2023 from an estimated 8.3 percent in FY’2022 and 11.4 percent in FY’2021.