BFSI: Retail vertical looks set to drive credit growth, says CRISIL

Banks are expected to log a credit growth of 8-10 per cent in fiscal 2022 despite the slowdown in the economy due to the second wave of Covid-19 during the first quarter.

Growth will be driven by the retail vertical, which continues to gain market share over the wholesale vertical (comprising corporate and MSME but excluding agriculture).

The systems and processes put in place after the first wave of the pandemic helped both banks and NBFCs manage operations and collections during the second wave. 

Banks, however, have continued to outpace non-banking financial companies (NBFCs) in most segments. Private banks have logged faster growth compared with public sector peers as they continue to sharpen focus on the retail segment. Among NBFCs, the larger players, with stronger parental support, have outperformed others. 

Within banks, credit issued to the retail segment, which was up 4 per cent as of October 2021, is expected to log 12-14 per cent growth this fiscal. Wholesale credit, which remained range-bound till October, is expected to grow 4-6 per cent, driven by construction, engineering, chemicals, and food processing segments. Agricultural loans are expected to increase 10-11 per cent on expectations of higher food grain and horticulture production, and support from the Agriculture Infrastructure Fund. In fiscal 2023, banks are projected to log a credit growth of 10-12 per cent.

On the other hand, NBFCs (excluding government financial institutions) are expected to clock credit growth of 6-8 per cent in fiscal 2022. Growth in loan book will be moderate for segments other than gold, housing, and personal loans.

In fiscal 2023, NBFCs are forecast to log credit growth of 8-10 per cent, riding on two tailwinds — improving economic activity and strong balance sheet buffers.

Meanwhile, the non-performing assets (NPAs) of banks are expected to increase to 8-9 per cent by March 2022, from 7.5 per cent in March 2021, largely due to slippages in the MSME and retail segments, which were impacted the most during the pandemic. Restructuring 2.0 should limit a further rise in NPAs. 

Given the restructuring dispensation, it is also important to look at stressed assets — gross NPAs and restructured assets — which were 9 per cent as of March 2021, almost 100 basis points higher year-on-year. Stressed assets are expected to settle at 10-11 per cent as of March 2022. Improving capitalisation levels and provisioning coverage ratios have strengthened the balance sheets of banks. 

Fundamentally, asset quality performance is expected to be stable for NBFCs. However, regulatory transitions and slippages from their restructured books would lead to higher NPAs. If we look at fragile assets, which incorporate these aspects, the impact on traditional asset classes such as home loans, gold loans and vehicle loans would be relatively lower than on other asset classes. The earnings profiles of NBFCs would see a temporary impact due to higher provisioning costs. However, sizeable capital raise, better provisioning buffers, and comfortable liquidity should support their credit profiles. 

Overall, the credit outlook for the financial sector is stable. This, however, does not factor in the impact of a possible third wave of the pandemic, especially with the Omicron variant spreading rapidly.