Moody’s Outlook on Indian Banks

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

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• 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.