new delhi growth in preprovision earnings and decline in bad loans will improve profitability of banks in the current fiscal a report said on mondaybetter profitability will offset increases in capital consumption due to an acceleration in loan growth helping banks across the system maintain capital at current levels moodys investors service said in a reportcapital ratios at public sector banks psbs have improved in the past year helped by capital infusions from the government it saidalso psbs as well as their private sector peers have proactively sought to raise capital from the equity capital market taking advantage of improvements in profitability to attract investor interest rated private sector banks had an assetweighted average common equity tier 1 cet1 ratio of 158 per cent at the end of 2021 which positions them well to capture opportunities to grow loans as economic conditions improve it saidfurther improvements in psbs financial health will continue to help them raise equity capital from the market reducing their dependence on capital support from the government it saidthe report further said gradual increases in domestic interest rates will boost net interest margins because banks will be able to pass on higher rates to borrowers while their funding costs will increase marginally because banks have reduced the share of highcost corporate term deposits in total depositsstable asset quality and existing provisions against legacy stressed assets will allow banks to reduce loanloss provisions it said adding the return on assets of rated psbs and private sector banks rose materially to 06 per cent and 15 per cent respectively in the nine months ended december 2021 from 04 per cent and 07 per cent in the fiscal year ended march 2018nonperforming loan npl ratios will decline because of recoveries or writeoffs of legacy problem loans while formation of new npls will be stable as the economy recovers it saidloan growth will help push npl ratios down by expanding the overall pool of loans even though new defaults may arise from loans that have been restructured because of economic disruptions from the pandemic it saidon the economic outlook it said indias economy is expected to recover in the next 1218 months with gdp growing 93 per cent in the year ending march 2022 and 84 per cent in the following yearimproving consumer and business confidence as well as improving domestic demand will support economic growth and credit demand it saidhowever it said the global economic fallout from the russiaukraine military conflict will create some risks as it fuels inflation because of rising oil prices and driving down the value of the local currency which will increase pressure on indias central bank to raise interest ratesincreasing corporate earnings and easing funding constraints for nonbank finance companies which are significant borrowers from banks will support loan growth it said adding that loan growth is expected to accelerate to 1213 per cent in fy23 from 5 per cent in fy21