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New Delhi: India’s bank credit will accelerate in the financial year ending March 2023 (FY23) despite effects of higher interest rates, Fitch Ratings on Monday said. It said the strong loan growth should benefit net revenue, particularly as it will be coupled with wider net interest margins.

“We see bank credit expanding by around 13 per cent in FY23, up from 11.5 per cent in FY22. The acceleration will be driven by the normalisation of economic activity after the COVID-19 pandemic, and high nominal GDP growth, which we expect to boost demand for retail and working-capital loans," Fitch said in a statement.

Fitch forecasts India’s real GDP growth at 7% in 2022-23. The rating agency said that the Indian banks generally remain open to additional capital-raising to fund growth, despite the rise in rates.

“Private banks are generally better than state banks at capital planning, although moves to raise fresh equity are likely to be opportunistic and incremental, which should reduce the risk that they create capital market stress," Fitch added.

Fitch expects system deposits to grow by 11% in both FY23 and FY24, slower than loan growth.

“Increased deposit rates may put some pressure on banks’ margins, but we expect declining credit costs to offset pressures on profitability - including the valuation impact of higher rates on investments - in FY23. System return on assets exceeded 1% in 1HFY23, up from 0.88% in FY22 by our estimates," it added.

According to Fitch, banks’ increased appetite for risk as they search for growth could have negative implications for their credit profiles, particularly if loss-absorption buffers are not raised sufficiently, and may affect their viability ratings.

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