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Indian banking sector's non-performing loans are expected to drop to 5-5.5% of the total advances by FY24-end, as per the S&P Global Ratings report. Following this, S&P expects credit costs to stabilise at 1.5% for fiscal 2023 and further normalise to 1.3%. S&P listed segments like small and midsize enterprises and low-income households to be vulnerable amid high inflation and rising interest rates, however, expect the impact to be limited. RBI which is the inflation trajectory central bank has hiked the policy repo rate by 90 basis points in the last two months to tame the multi-year high consumer price index.
RBI in its Financial Stability Report published June 30, expects gross non-performing loans of Indian banks to decline to 5.3% by March 2023, and further to drop from a six-year low of 5.9% in March 2022.
In its Global Banking Outlook--Midyear 2022 report, S&P said, "We project the banking sector's weak loans will decline to 5%-5.5% of gross loans by March 31, 2024. Likewise, we forecast the credit costs to stabilize at 1.5% for fiscal 2023 and further normalize to 1.3%, making credit costs comparable to those of other emerging markets and to India's 15-year average."
" The small and midsize enterprise sector and low-income households are vulnerable to rising interest rates and high inflation. But, in our base case of moderate interest rate hikes, we view these risks as limited. With an economic pick-up, residual stress for these segments should start abating. Nonperforming loan (NPL) recoveries are likely to also gain momentum, limiting the rise in NPLs," it added.
S&P expects economic growth momentum to continue. It said that India's economic growth prospects should remain strong over the medium term, with GDP expanding 6.5%-7% annually in fiscal years 2024-2026.
Further, S&P's note added, "The economy's long-term higher growth rate versus peers highlights its historical resilience. India's wide range of structural trends, including healthy demographics and competitive unit labor costs, work in its favor. Additionally, we expect the government to remain supportive of the system."
"There is a very high likelihood the government will continue to support public-sector banks, notwithstanding plans to privatize two such banks," S&P said.
In the next few years, S&P expects loan growth to stay somewhat in line with the trajectory of nominal GDP, and loan growth to the retail sector to continue to outperform the corporate sector. Corporate borrowing is also picking up momentum, with both working-capital needs and capital expenditure-related growth driving demand. Still, if risk management does not improve, the coming growth cycle could produce a new crop of sour loans.
Also, S&P added, "Lower credit costs and a pick-up in loan growth should sustain the turnaround in banks' earnings. We expect the return on average assets to normalize to 1% in fiscal 2023--an eight-year high. Improving profitability should augment capital formation.
Capitalization has increased in the past few years due to banks' capital-raising and the government's capital infusions into public-sector banks. Capital ratios are comparable to those of international peers for India's large private-sector banks, though they are lower for public-sector banks.
On the performance of banks, S&P said, State Bank of India and the leading private-sector banks have largely addressed their asset quality challenges, and their profitability is improving more sharply than the system's. Many large public-sector banks are still saddled with weak assets, continued high credit costs, and poor earnings. Similarly, it added, "We expect a mixed-bag performance for finance companies (fincos). The asset quality of these fincos is often weaker than that of major private-sector banks."