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Mumbai: Although the banking sector’s operational and credit growth performance is expected to continue, with double-digit loan growth expected in 2022-23, multiple rate hikes may slow growth, Care Ratings said in a note on Monday.

RBI has already increased the repo rate four times so far in FY23, and additional hikes are anticipated during the year. Deposit rates are also expected to rise as the competition for deposits would increase due to liquidity issues amidst strong underlying credit demand, coupled with a widening difference between credit and deposit growth rates.

“Banks that have a higher current account and savings account (CASA) share and proportion of floating loans are expected to benefit and protect the net interest margin (NIM) in the current rising interest scenario. NIMs are expected to increase in the short term and then stabilise with negative bias due to the repricing of liabilities," it said.

It said that banks have already witnessed significant treasury losses in Q1 of FY23, further, the yields on bond have stabilized in Q2 FY23. As per an earlier Care Ratings report, the yield on 10 years G-sec is expected to be around 7.5-7.75%.

“Hence, incremental mark-to-market (MTM) losses are not likely to be as severe in the coming quarters. Nevertheless, treasury income is expected to be muted for FY23," it said.

The gross non-performing asset (NPA) ratio of scheduled commercial banks is expected to be around 5% in FY23 and reach pre-AQR (asset quality review) levels of approximately 4% in FY24 due to lower incremental slippages and reduction in restructured books.

“Nevertheless, the performance of restructured accounts especially for the micro, small and medium enterprise (MSME) segment continues to be a key monitorable. Sales of NPAs to, especially to newly set-up asset reconstruction companies (ARCs) are expected to further clean up the books and bring liquidity to the banks," the note said.

According to Care Ratings, banks have raised substantial capital over the last few years and currently are well-capitalized. Besides, they are expected to raise tier 2 capital and deposits from the market to meet strong credit demand.

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