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GNPA likely to decline to 2.5% by FY25 from 3.9% in FY23

CRISIL Ratings hosted a webinar titled “Ratings Roundup 2HFY24” to discuss industry rating actions, credit growth, asset quality, and profitability outlook. The webinar was presented by Mr. Krishnan Sitaraman, Senior Director and Chief Ratings Officer; Mr. Somasekhar Vemuri, Senior Director, Regulatory Affairs & Operations, and Chief Criteria Officer; and other senior team members. Following are the key insights from the session.

India to remain the fastest-growing large economy in the world

* India's GDP is projected to grow at 7.6% in 2024, marking the highest growth rate among major economies, propelled by a robust domestic market and government-led investments that have bolstered demand. However, projections indicate a moderation in India's GDP growth to 6.8% in 2025 as elevated interest rates and reduced fiscal stimulus are expected to taper demand. Over the remainder of the decade (fiscal years 2025-2031), the average GDP growth is estimated to remain steady at 6.7%.

* The global economy is facing significant risks such as slower growth and stringent financial conditions, with projections indicating a growth rate of 3.2% in 2024 vs. 3.4% in 2023. This slowdown is compounded by the ongoing challenge of high inflation, which is impacting purchasing power and placing strain on global goods exports.

Rating upgrades continue to outpace downgrades; credit outlook positive

* The upgrade rate stands at 12% as of 2HFY24 (12.7% in 1HFY24) and continues to be higher than the 10-year average of 10.7%, with sectors like auto components, renewable energy, steel, roads, construction, and real estate showing buoyancy. The downgrade rate stood at 6.7%, near the 10-year average, largely led by sectors that were impacted by subdued global demand, a fall in realization in textile and marine exports, and fluctuating raw material prices.

* The credit ratio moderated further to 1.79x in 2HFY24 from 1.91x in 1HFY24 and 2.19x in 2HFY23; however, it is still healthy. The outlook for corporate credit quality remains optimistic for 1HFY25 buoyed by government-driven capex in infrastructure projects and stable domestic demand. Annual capex growth is anticipated to range between 9% and 11% over the next four years, supported by an upswing in the industrial segment and sustained momentum in infrastructure investment.

Bank credit expected to grow at ~14% and cross INR2tn by Mar’25; NBFC growth likely to decelerate

Systemic credit growth is expected to remain healthy at ~16% in FY24 (16% in FY23), but it is expected to moderate to 14% in FY25 amid lower GDP growth, a gradual revival in private capex, and the impact of higher risk-weights on NBFCs and unsecured lending.

For NBFCs, growth may moderate to 15-17% in FY25 from ~18% in FY24 owing to the measures taken by the RBI, which hampered growth in unsecured loans. However, in the traditional segments, growth is expected to remain steady.

Corporate sector: Deleveraged Balance sheet to aid private capex uptick

Although most sectors maintain low leverage, gearing levels are anticipated to be benign at approximately 0.5x in FY25. The high capacity utilization levels should give a boost to the private sector's capex cycle, supported by policy initiatives. Investment in infrastructure and related sectors is expected to remain intact, alongside capex growth in sectors benefiting from production-linked incentive (PLI) schemes, such as automotive, auto ancillaries, and pharmaceuticals. It is further projected that capex growth will range around 9-11% over the coming years, driven by an uptick in the industrial segment and sustained momentum in infrastructure investment.

Credit quality outlook to stay positive in 1HFY25

India's credit quality outlook remains positive, with expectations of more upgrades than downgrades in 1HFY25, supported by upward revisions in GDP growth rates highlighting solid domestic demand. The multiplier effect of government capex should keep the momentum intact in infrastructure and related sectors. Sound balance sheets will continue to bolster the credit outlook, while prudent funding of capex is observed.

According to a CRISIL study, PSU banks are seeing an improvement in asset quality, with healthy growth in AUM. SFBs are leading in growth with stable asset quality, while private banks are expected to exhibit healthy asset quality and AUM growth. Most sub-segments of the financial sector maintain 'Strong/Stable' credit quality, supported by retail credit demand and strong balance sheets. However, evolving regulatory measures could impact growth and should be closely monitored.

Margin to witness compression; RoA to moderate by 10bp in FY25 to 1.1%

Margins are expected to decrease by 10-20bp to 3-3.1% in FY24 (from 3.2% in FY23), primarily due to the upward trend in deposit rates. In terms of capitalization, the banking sector possesses adequate buffers and is well-positioned for growth in the medium term. Despite recent regulatory adjustments such as increased risk weights on exposure to unsecured consumer credit and higher-rated NBFCs, which may slightly impact capital adequacy levels, PSU banks have benefited from government capital infusion and improved internal accruals. Additionally, most private banks have historically maintained comfortable buffers, with many also benefiting from capital raised in recent quarters.

* However, asset quality is anticipated to improve, with GNPA projected to decline to a fresh decade low of 2.5% in FY25.

* This improvement in asset quality is expected to lead to further reductions in credit costs, thereby offsetting the pressure on NIM and supporting overall profitability.

* Consequently, ROA is estimated to decline to 1.1% in FY25 from 1.2% in FY24.

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