“Deposits rates to continue to move higher as credit demand strongly outpaces deposit generation,” the rating agency said.
The agency also upwardly reviewed its credit growth estimate to 13 per cent from the earlier expectation of 10 per cent, on higher working capital demand, shift to bank lending from capital markets and revival in demand from the corporate segment, it said.
It said private sector banks are likely to gather pace on deposit accretion supported by the offering of better yields as competition for deposits intensifies.
The deposit rates will move higher also because of record cash holdings and increased risk appetite among banks, which would lead to higher competition for deposits, it said.
The agency, which maintained the stable outlook for banks in its review, said asset quality metrics are continuing to improve for the banking system, with the Gross Non-Performing Assets (GNPA) ratio for the banking system declining to 6.1 per cent in FY22 from a peak of 11.8 per cent in FY18.
The GNPAs are likely to increase to 6.8 per cent in FY23 due to pressure from small business lending, it said, adding that it can come at 5.3 per cent if the potential write-offs of 1.5 per cent are included.
The agency said it expects provisioning cost for FY23 to be about 1 per cent against 1.4 per cent in FY22.
The net interest margins are also likely to see tailwinds as interest rates continue their upward trajectory and loans tend to be repriced faster than deposits in an upward rising interest rate environment, it said.
The stable rating outlook for banks for FY23 indicates their waning legacy asset quality issues, strengthened balance sheets, manageable Covid-19 impact and expectations of improved profitability across the banking sector.
It also said that banks are better placed to absorb the impact of rising yields in the current upward trending interest rate cycle as compared to the past.