Moody’s Ratings (Moody’s) said that Indian banks and non-bank finance companies (NBFCs) are well placed to seize opportunities from the country’s strong economic prospects through lending growth in sectors such as infrastructure, energy transition, manufacturing, small businesses and retail.
Moody’s views that the credit quality of India’s financial system has strengthened over the past 3-4 years. Record-high profitability, low delinquencies and stable domestic-oriented funding underpin financial institutions’ stable credit ratings. Their capitalization has also improved with healthy internal accruals and capital raising from buoyant debt and equity markets.
Moody’s expects loan growth of 12 per cent to 14 per cent over the next 12 to 15 months as loans grow in line with deposits. Systemwide net interest margins will soften selectively as banks reprice maturing deposits at higher rates to reflect previous increases in interest rates.
Still, the systemwide return on assets will remain healthy with low loan-loss provisions despite a slight increase from cyclically muted levels, while banks’ capitalization will remain stable.
The Reserve Bank of India’s initiatives to pre-emptively manage credit growth in high-risk segments such as unsecured loans, along with tighter scrutiny on areas such as customer protection, risk management, cyber security and IT infrastructure, will enhance financial stability.
“For India’s financial institutions, leadership in technology adoption as well as their risk management, governance, customers’ experience and balance-sheet buffers will separate winners from losers over the next 2-3 years,” says Amit Pandey, a Moody’s Vice President and Senior Analyst.
Credit growth to continue, as will improvements in asset quality, says Icra. Meanwhile, ICRA, an affiliate of Moody’s in India, says the extent of growth of systemic liquidity and deposit in India will continue remain a key driver for the credit growth for banks amid strong demand for credit.
ICRA expects the banking sector’s performance to remain strong with healthy profitability primarily driven by strong loan growth and a favorable credit environment.
The evolution of systemic liquidity and deposit growth will continue to drive credit growth for banks amid strong demand.
The agency estimates that despite a moderation in growth, credit is set to increase INR19.0 trillion-INR20.5 trillion in the fiscal year ended March 2025 (fiscal 2025), which would be the sector's second-highest increase.
“Corporate asset quality continues to remain stable; however certain asset classes in retail unsecured segments are seeing increased stress. Reduced credit flow could further pressure asset quality in these segments, but overall fresh slippages and credit costs will remain benign for banks,” says Karthik Srinivasan, ICRA’s Senior Vice President and Group Head.
ICRA forecasts asset quality improvements will continue, with headline gross non-performing advances (NPAs) and net NPAs declining to their lowest levels in over a decade at 2.30 per cent and 0.55 per cent, respectively, by 31 March 2025, from 2.81 per cent and 0.64 per cent, respectively, as of 31 March 2024.
Despite likely pressure on net interest margins, robust loan growth and benign credit costs will aid a steady return on assets (ROA) of 1.0 per cent and return on equity (ROE) of 12.1 per cent in fiscal 2025, compared with 1.3 per cent and 16.1 per cent, respectively, in fiscal 2024.
Banks have also enhanced their capital cushions as their profitability improved, and most will likely be able to transition to the expected credit loss (ECL) framework without a significant need for fresh capital or regulatory forbearance.
ICRA projects growth in the NBFC sector will moderate, especially in the non-mortgage retail loan segment, on back of expanded assets under management (AUM) following the high growth rates seen in the past two fiscal years.
The personal and consumption loan segments, which grew at steep rate in the previous two fiscal years, will experience relatively muted growth in the current fiscal year in light of regulatory actions on such loans.
