Rating agency Moody's has maintained 'stable' outlook for India's banking system. The operating conditions for banks will be stable, supported by improving consumer and business confidence, as well as improving domestic demand, Moody's said in a statement.
Still, the banking sector's financial fundamentals will improve. Declines in loan-loss provisions and increases in net interest margins will boost banks' profitability.
Moody’s said that capitalisation, funding, and liquidity will be stable and support loan growth. However, the global economic fallout from the Russia-Ukraine military conflict will create some risks, pushing up inflation and interest rates, and creating supply constraints.
The Indian economy is expected to continue to recover in the next 12-18 months and the gross domestic product (GDP) will grow at 9.3 per cent in the year ending March 2022, and 8.4 per cent in the following year. Improving consumer and business confidence, as well as improving domestic demand, will support economic growth and credit demand.
The increasing corporate earnings and easing funding constraints for non-bank finance companies (NBFCs), which are significant borrowers from banks, will support loan growth. The growth in bank loans is expected to accelerate by 12-13 per cent in fiscal 2023 from five per cent in fiscal 2021, Moody's added.
Asset quality will improve
The non-performing loan (NPL) ratios will decline due to recoveries or write-offs of legacy problem loans, while the formation of new NPLs will be stable as the economy recovers. Loan growth will help push NPL ratios down by expanding the overall pool.
The asset-weighted average of rated banks' gross NPL ratios nearly halved to 5.7 per cent as of 31 December 2021 from a peak of 10.3 per cent at end of March 2018.
The rating agency flagged prospects of rise in asset quality pressure and said new defaults may arise from loans that have been restructured because of economic disruptions from the pandemic.
Capital will be stable
The improving profitability will offset increases in capital consumption due to an acceleration in loan growth, helping banks across the system maintain capital at current levels.
Capital ratios at public sector banks (PSBs) have improved in the past year, helped by capital infusions from the government. Also, PSBs, as well as their private sector banks, have proactively sought to raise capital from the equity capital market, taking advantage of improvements in profitability to attract investor interest.
Rated private sector banks had an asset-weighted average Common Equity Tier 1 (CET1) ratio of 15.8 per cent at the end of 2021.
PSBs' capitalisation remains weaker than that of their private sector peers. However, their asset-weighted average CET1 rose to 10.5 per cent at the end of 2021 from 10 per cent as of end-March 2021.