Crisil has projected a decline in the return on assets (RoA) for the banking sector by 10-15 basis points to 1.15-1.2% this fiscal year. Despite this reduction, the sector's RoA will remain above its 20-year average of 0.8% and 10-year average of 0.6%, according to the rating agency.
The primary factors contributing to this decline include a softening in treasury income and an increase in provisioning. Crisil anticipates treasury income to decrease by 5-10 basis points from last year's 1.2% due to rising bond yields and normalization of investment portfolio gains. Last year's treasury income was bolstered by a significant drop in bond yields in the first half, which enhanced mark-to-market gains.
Additionally, Crisil expects banking sector provisions to rise by 5-10 basis points, although they should remain below 0.5%. This increase is attributed to banks making pre-emptive provisions in anticipation of the Expected Credit Loss (ECL) regime set to commence on April 1, 2027, rather than asset-quality stress.
“As credit growth continues to outpace deposit growth, competition for deposits remains intense. This, coupled with increasing reliance on pricier funding sources such as bulk deposits, would likely push deposit costs up.”
Subha Sri Narayanan, Director, Crisil Ratings
Deposit costs are likely to edge higher as credit growth continues to outpace deposit growth, intensifying competition for deposits. Crisil also highlighted a growing reliance on costlier funding sources such as bulk deposits, despite lending and deposit rates having already adjusted following last fiscal's repo rate cuts.
Fee income is expected to grow alongside credit growth, while credit costs should remain contained. However, there may be some pressure from disruptions related to West Asia affecting MSME borrowers. Government support measures, such as the Emergency Credit Line Guarantee Scheme (ECLGS) 5.0, are expected to mitigate any impact on bank credit costs.
Background
The banking sector's RoA has been on a recovery path following the challenges faced during the pandemic. The projected decline in RoA, while notable, still positions the sector favorably compared to historical averages, reflecting a resilient banking environment.
Looking ahead, stakeholders should monitor how banks manage their treasury operations and provisioning strategies in response to evolving market conditions. The impact of credit growth dynamics and government interventions will also be crucial in shaping the sector's financial health.
