New Delhi, Dec 28 (IANS): Improved asset quality, along with lower credit provisions, could drive better profitability for banks and rejuvenate their lending decisions, ICRA Ratings said on Monday.

Low-interest rates, improved business volumes, better job prospects and income levels could also stimulate credit demand next year, the agency said.

"This, coupled with better competitive positioning of banks vis-a-vis other lenders driven by a steep decline in cost of deposits, could improve bank credit growth to 6-7 per cent in FY2022 from an estimated 3.9-5.2 per in FY2021 and 6.1 per cent in FY2020," the agency said in a statement.

"As moratorium on loan repayments is over and though we await the Hon'ble Supreme Court directive of on asset classification, the Gross NPAs and Net NPAs for the banks are likely to rise in the near term to 10.1-10.6 per cent and 3.1-3.2 per cent, respectively, by March 2021 from 7.9 per cent and 2.2 per cent, respectively, as of September 2020 and the resultant elevated credit provisions during H2 FY2021 as well."

However, it expects net NPAs and credit provisions will subsequently trend lower in FY2022 as the banks have reported strong collections on their loan portfolio with most banks reporting collections of over 90 per cent.

"The loan restructuring requests much lower than previously estimated which has been supported by sharper than expected improvement in economic activities as well as liquidity support through emergency credit line guarantee scheme."

Consequently, ICRA revised its loan restructuring estimates downward to 2.5-4.5 per cent of advances as against 5-8 per cent estimated earlier.

Anil Gupta, Sector Head - Financial Sector Ratings, ICRA Ratings, said: "With expectations of sustained collections and lower restructuring, the asset quality is expected to improve further with net NPA declining to 2.4-2.6 per cent by March 2022."

"This will lead to lower credit provisions and better profitability in FY2022."

As per ICRA, credit provisions are expected to decline to 1.8-2.4 per cent of advances during FY2022 from an estimate of 2.2-3.1 per cent in FY21 and 3.1 per cent in FY20, which will lead to an improvement in return on equity (RoE) for banks.

Besides, the agency expects public banks to break even after six consecutive years (FY 2016- FY 2021) of losses and generate RoE of 0.0-5.4 per cent for FY 22.

"The RoE for private banks is also estimated to improve to 9.5-10.5 per cent in FY 2022," the statement said.

"The capital position for large private banks is strong and can withstand the stress case scenario for asset quality after these banks raised Rs 544 billion of capital during 9M FY 2021."

Furthermore, the agency said with large capital raise and expectations of improved profitability, the banks are also well placed to exercise call options on their Rs 260 billion of AT-I bonds falling due in FY22 and FY23 without a significant impact on their capital.

"The rating agency expects capital requirements for private banks to be limited to a few mid-sized and small private banks at less than Rs 100 billion till FY2022."

The AT-I bond market for public banks has revived in the current year with more public banks issuing these bonds as compared to last year.

In addition, few public banks have been also able to raise equity capital totalling Rs 75 billion from markets after a long gap of almost three years.

This, coupled with the Centre's budgeted equity capital infusion of Rs 200 billion for FY 2021, should suffice for FY 2021, he said.

"Public banks will need to raise additional capital of up to Rs 430 billion next year as they have call options falling due on the AT-I bonds totalling Rs 233 billion during FY 2022," Gupta said.

"Capital will also be required to support credit growth as their internal capital generation could remain weak even next year. The ability of public banks to raise capital from markets will be critical to reducing GoI's recapitalisation burden next year."