Credit profiles of Indian banks and non-banking financial companies will remain resilient despite the challenging global environment, Moody’s Investors Service and ICRA said in a report on Tuesday.
The credit quality of these lenders will be aided by strong domestic demand, improving credit conditions for bank borrowers, strengthened solvency and funding of rated Indian financial institutions.
Going ahead, Moody’s affiliate ICRA expects the banking sector’s performance to remain strong as profitability will be driven by strong loan growth and a favourable credit environment, the report said.
The gross non-performing asset ratio of banks is expected to fall to 2.6% as on March 31, 2024 from 4% as on March 31, 2023.
Credit cost is expected to fall to 0.9% in 2023-24 from 1% in 2022-23. Return on assets is expected to remain at similar levels.
Moody’s contends that the credit conditions in India have gradually improved, with a significant reduction in the banks’ stock of legacy problem loans over the past three years. Also, the financial health of corporates has also risen following a decade of deleveraging.
Additionally, stress among non-bank financial institutions has also abated.
On the other hand, deposit costs are likely to rise going ahead as there is a repricing of deposits base in 2023-24. This will putting pressure on net interest margins of banks. However, robust loan growth will help keep core operating profits at a steady level, the report said.
A transition to expected credit loss-based provisioning is expected to increase the capital requirements for some banks.
“Banks globally are facing liquidity pressures amid tighter monetary policy, outflows of excess liquidity built up during the coronavirus pandemic into more profitable investments and increased risk aversion among investors because of stress in the US banking sector,” says Moody’s Associate Managing Director Alka Anbarasu.
“Indian banks, however, have strong domestic funding franchises and ample liquidity to support growth in their loans in line with India’s strong economic conditions,” she added.
The y-o-y loan growth of banks is likely to moderate to 11.0-11.7% in 2023-24 from 15.5% in 2022-23 due to higher interest rates. But, incremental credit growth is expected to be Rs 15.0-16.0 trillion in 2023-24, the banking sector’s second-highest increase on record.