Aided by better recoveries and declining slippages, overall net non-performing assets (NPAs) of the banking sector are likely to improve to 3.2-3.3 per cent by the end this fiscal from 3.7 per cent in September 2019, says a report.
Net NPAs of banking sector stood at 3.8 per cent as of March 2019.
"The asset quality for the banking sector continues to improve with declining slippages and expected improvements in recoveries during FY20 even though loan write-offs continue to remain at elevated levels," rating agency ICRA said in a report.
A recent RBI report on trends and progress of banking sector showed that recovery of stressed assets improved during FY19 propelled by resolutions under the IBC, which contributed more than half of the total amount recovered.
Banks recovery from bad loans had improved by 15.5 per cent in FY2019 from 14.9 per cent in FY2018.
The rating agency said the decline in net NPAs will improve the solvency profile of banks, with core equity bettering to around 29 per cent by March 2020 and nearly 27 per cent by March 2021 from 33 per cent as on September 30, 2019.
The report said with sizeable capital infusion in public sector banks and accelerated provisions, their NNPAs declined sharply to 4.8 per cent as on September 30, 2019 from 7.2 per cent as on September, 2018 and 4.9 per cent as on March 31, 2019.
Private lenders net NPAs improved to 1.7 per cent as on September 30, 2019 from 1.9 per cent as on September 30, 2018, but were marginally higher than 1.6 per cent as on March 31, 2019.
The report said with reduction in net bad loan levels, credit provisions for banks are expected to decline to 1.6-1.8 per cent of advances in the current fiscal and 0.8-0.9 per cent during FY2021 from 3.6 per cent during FY2019.
The decline in the credit provisions will largely be driven by state-run banks with their provisioning declining to 2.1-2.3 per cent in FY2020 and to 1-1.1 per cent in FY2021 from 4.4 per cent during FY2019.
The report further said the year-on-year growth in bank credit is expected to decelerate sharply to 6.5-7 per cent in FY2020 from 13.3 per cent in FY2019, following limited incremental credit growth the current fiscal till date.
"The incremental bank credit has increased by only Rs 0.80 trillion during FY2020 till December 6, 2019 to Rs 98.1 trillion, in contrast to the rise of Rs 5.4 trillion and Rs 1.7 trillion during previous corresponding periods of FY2019 and FY2018, respectively," the rating agency said.
Even in a high growth scenario, whereby incremental credit rises to Rs 6.5-7 trillion during the second half of FY2020, the rating agency projects a 40-45 per cent y-o-y decline in incremental net bank credit to Rs 6.3-6.8 trillion during FY2020 from Rs 11.9 trillion during FY2019.
On the capital front, the report said the state-run banks' incremental capital requirements for 6-8 per cent growth in risk weighted assets and increasing regulatory requirements will remain limited at Rs 10,000-20,000 crore for FY2020.
The government has announced a capital infusion of Rs 70,000 crore in state-run banks for FY2020, of which Rs 59,800 crore have been infused during September 2019, including Rs 4,557 crore in IDBI Bank.