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Rating agency ICRA has said that the recent improvement in recovery of the non-performing assets (NPAs) and decline in provisioning of loans in the banking sector are expected to improve further in the coming year. Accordingly, it said the improvement in such parameters has helped realise better profitability for the banks. However, subdued credit growth and surplus liquidity continue to be a drag on the profit margins for the sector.

Anil Gupta, Vice-President and Sector Head at ICRA said ‘The banking sector navigated well during 2022, despite the challenges posed by the second wave of Covid-19... Even in the absence of relief measures such as moratorium on loan repayments or standstill on NPA classification, which were allowed during the first wave, banks were able to reduce their NPAs’.

For small finance banks (SFBs), the Covid-19 pandemic significantly impacted the performance during FY21 and H1FY22 in terms of growth, asset quality and profitability. The rating agency expects the SFB sector to witness improvement in asset under management growth in FY22 as compared with FY21, but the asset quality metrics are expected to remain weak, which would thereby keep credit costs elevated and hence profitability subdued.