Interview. Job losses at MNCs are largely an imported issue: Krishnan Sitaraman of CRISIL

I would put it in a slightly different way that economic activity is back on track. Sectors like airlines and tourism are registering strong recovery. Travel, tourism and consumption demand in general has picked up very well. Retail sectors saw strong festive season as buying and economic recovery is clearly visible.

Over the next four years, India should grow at an average 6.5 per cent which is significant in the global context. There will be some challenges for export-dependent sectors because we have imported inflation and imported risk-kind of dispensation as most countries will experience a slowdown.

Globally, the situation is more stressful. So export-oriented sectors will have lower operating cash flows and margins but their balance sheet will not be impacted much because leverage levels have gone down. From a debt repayment and credit quality perspective, we still expect upgrades to be more than downgrades in the near to medium term.

Overall profitability for banks will be higher in FY23 than FY22 because bulk of the loans are floating rate but only incremental deposits get repriced. The investment book will be impacted due to MTM depreciation but many banks have rejigged their investment portfolio to bring down the duration, due to which the impact of rising interest rates is lower.

Excluding BFSI and oil companies, the operating margins of large listed companies went up from 16-17 per cent pre-pandemic to 21-22 per cent during Covid-19. It came down by around 200 bps in FY22 due to cost pressures, and FY23 should also see a 250 bps correction after which it will go back to pre-Covid levels.

There was substantial cost savings during Covid-19 for large companies as there was a shift to quality and so their margins increased. That is normalising this year.

FY23 margins will be lower for sectors like cement and steel, which had a bumper FY22. Oil marketing companies will also see impact on margins because final product prices have not gone up as much as crude oil prices.

The diamond sector is largely export-oriented as 80-90 per cent of global finished diamonds are polished in India. Because of economic slowdown, discretionary expenditure has fallen and demand for items like diamonds is relatively lower. Supply of rough diamonds has also been hit due to the Russia-Ukraine war and so operating margins may be impacted.

Some textile segments may see an impact due to export reasons. There could also be a couple of sectors where the balance sheet leverage may be higher, but overall, margins for bulk of the sectors will remain broadly stable.

You can’t say that. Banking operations very clearly see cycles. Today, credit growth is over 17 per cent, but bulk of the growth is working capital demand, and we are seeing bond market substitution. Bond rates have gone up more than bank loans, so issuances have remained subdued this fiscal. 

From September 2018 to September 2022, MF debt exposure to NBFCs has come down from ₹2.7-lakh crore to ₹1.2-lakh crore but bank lending to NBFCs has more than doubled from ₹5.5-lakh crore to ₹11.7-lakh crore. So banks are lending far more to NBFCs and they seem comfortable taking these exposures. 

We are projecting 15 per cent credit growth for FY23 and FY24. We expect deposit growth to be somewhat lower. But because the deposit base is larger than the credit base, even a slightly lower deposit growth will for some time be able to support credit growth.

Credit quality wise, banking sector is in a sweet spot today. NPAs are in a cyclical downward trend which will continue till capex picks up and and companies start increasing leverage.

But even though there are cycles, structurally things seem to be improving as the amplitude of the cycles is coming down in terms of peak NPA. NBFCs’ fundamental asset quality is also on an improving trajectory and balance sheets are looking better now.