S&P Global Ratings stated in its most recent research study on the global banking landscape that while the government-owned State Bank of India (SBI) and top private banks have resolved their asset quality concerns, the same cannot be said of many other Indian public sector banks (PSB).
According to the report, many large PSBs are still saddled with weak assets, high credit costs and poor earnings and the polarisation of the bank performance will persist.
Simply put, credit cost is the value of loan loss/bad loans.
"Similarly, 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," the report notes about the Indian banking and financial sector.
The global credit rating agency said India's economic growth prospects should remain strong over the medium term, with gross domestic product (GDP) expanding 6.5 percent-7 percent annually in fiscal years 2024-2026.
"We project the banking sector's weak loans will decline to 4.5 percent-5 percent of gross loans by March 31, 2024. Likewise, we forecast the credit costs to normalise to 1.2 percent for fiscal 2023 and stabilise at about 1.1 percent-1.2 percent for the next couple of years. This makes credit costs comparable to those of other emerging markets and to India's 15-year average," S&P Global said.
Over the next few years, S&P Global expects the loan growth in India to stay somewhat in line with the trajectory of nominal GDP, and loan growth to the retail sector to continue to exceed that of the corporate sector.
Corporate borrowing is also picking up momentum, but the uncertain environment may delay capital expenditure-related growth, the report notes.
"A shift to bank funding from capital market funding is also driving a pickup in corporate loan growth. Deposits may find it hard to keep pace, leading to a weakening in the credit-to-deposit ratio," S&P Global said.
According to the report, the credit-to-deposit ratio has improved in the past few years.
With inputs from Agencies.
