Indian Banks, NBFCs Expected To Maintain Strong Credit Profiles: Icra

Moody's Investors Service and International Credit Rating Agency (ICRA), in their recent report, state that the credit profiles of Indian banks and non-banking financial companies (NBFCs) are expected to remain strong despite the challenging global environment. The report highlights various factors contributing to this resilience.

The credit quality of these lenders will be supported by robust domestic demand and improving credit conditions for bank borrowers. Additionally, the solvency and funding of rated Indian financial institutions have been strengthened, further enhancing their credit profiles.

ICRA, an affiliate of Moody's, expects the banking sector's performance to remain strong, driven by favourable credit conditions and profitability resulting from strong loan growth. The report predicts a decrease in the gross non-performing asset ratio of banks from 4 per cent as of March 31, 2023, to 2.6 per cent as of March 31, 2024.

Credit costs are expected to decline from 1 per cent in 2022-23 to 0.9 per cent in 2023-24, while return on assets is projected to remain stable. Moody's also notes that credit conditions in India have gradually improved, with a significant reduction in legacy problem loans and improved financial health among corporates and non-bank financial institutions.

However, the report highlights potential challenges such as rising deposit costs, which may put pressure on net interest margins for banks. Nevertheless, robust loan growth is expected to help maintain steady core operating profits. The transition to expected credit loss-based provisioning is also expected to increase capital requirements for some banks.

Despite global liquidity pressures faced by banks, Moody's Associate Managing Director Alka Anbarasu emphasizes that Indian banks possess strong domestic funding franchises and ample liquidity to support loan growth aligned with the country's robust economic conditions.

The report forecasts a moderation in year-on-year loan growth to 11.0-11.7 per cent in 2023-24 due to higher interest rates. However, incremental credit growth is expected to reach Rs 15.0-16.0 trillion in 2023-24, marking the second-highest increase on record for the banking sector.

In summary, the report by Moody's and ICRA highlights the resilience of Indian banks and NBFCs, citing strong domestic demand, improved credit conditions, and strengthened solvency and funding as key factors supporting their credit profiles.