Context:
Despite concerns regarding rising bad loans, Moody’s remains firm on the stable outlook for Indian banks.
Key Highlights of the Report
- Asset quality is under pressure
- NPLs are expected to rise somewhere in the range of about 2.5 3.0% within 12 18 months.
- Stress on unsecured retail loans microfinance and lending to small businesses is bringing in that increase.
- Corporate Loan Quality Remains Strong
- Corporate loans are in good shape, supported by deleveraging and earnings growth.
Current State of NPLs
- Stark Decline in NPLs
- Systemwide NPL ratio collapsed from 7.3% (in March 2024) to 2.6% (in September 2024).
- Mostly because of recoveries and write offs of legacy bad loans.
- Factors supporting expected NPL increases
- Slower economic growth in recent quarters.
- Impact of past interest rate hikes
- Aging unsecured retail loans.
- Nonetheless, unsecured retail loans constitute only 10% of total banking loans, and banks have good reserves against defaults.
Favorable Operating Conditions for Banks
- The Institute’s executive director foresees a supportive banking environment influenced by:
- Government capital expenditures (capex) to boost infrastructure and industrial growth.
- Tax cuts for the middle class households that would increase consumption.
- Potential monetary easing that might reduce borrowing costs.
Loan Growth & Deposit Trends
- Balanced Growth Expected
- Loan and deposit growth are expected to remain in tandem, while the Loan to Deposit Ratio (LDR) is expected to remain stable at ~80%.
- Key Banking Numbers (RBI) for Balance Date February 21, 2025
- Credit to Deposit Ratio: 79% (last year 78%).
- Growth in Bank Credit: 11.0% YoY.
- Growth in Deposit: 10.3% YoY.
Economic Outlook & Conclusion
- GDP Growth of India
- Likely to support banking growth as more than 6.5% in FY26 (ending March 2026) is expected.
- The Bottom Line
- While moderate asset quality deterioration is expected, banks will remain stable on the balance between strong capital buffers and favorable economic conditions.
- Loan quality by companies remains strong, while banks are well fortified against potential shocks.
