'India's growth potential is strong': Moody's maintains stable outlook on Indian banks

India's banking sector outlook remains stable and is supported by economic growth and improved financials, Moody's Investors Service said on Wednesday. In the last few weeks, concerns were raised about the health of Indian banks after a damaging report was published by the US-based short-seller Hindenburg Research on the Adani Group.

Also read: 'Indian banking sector not likely to be affected by an individual case': Shaktikanta Das on Adani row

The global rating agency said while it expects the country's real GDP growth to moderate in the fiscal year ending March 2024, India's underlying growth potential is fundamentally strong, which will support banks' credit growth and asset quality.

However, the agency said, loans to small and medium-sized enterprises continue to pose risks to banks' asset quality because this segment is the most vulnerable to rises in interest rates.

The central bank has increased the lending rate by 250 basis points since May 2022 to control persistent high inflation caused by a combination of factors like the ongoing war in Ukraine and high commodity prices.  

Also read: Tough year ahead but India in a relatively bright spot, says IMF's Gita Gopinath

Moody's said the asset quality of banks will be stable, and non-performing loan (NPL) ratios will decline modestly because of recoveries and write-offs of legacy problem loans.

The rating agency said banks' profitability will stabilise after improving in the past few years as the boost from declines in loan-loss provisions wanes. "Banks' capital, funding, and liquidity will be stable and supportive of credit growth," Moody's said.

Maintaining a stable outlook for India's banking system, the agency said the country's economy will continue to grow strongly, despite external challenges.

Earlier this month, the RBI said the country's banking sector "remains resilient and stable". It said various parameters relating to capital adequacy, asset quality, liquidity, provision coverage, and profitability were healthy. 

"Banks are also in compliance with the Large Exposure Framework (LEF) guidelines issued by the RBI," the bank regulator said, allaying the fears over banks' exposure to Adani Group.  

Today, Moody's said it expects India's real GDP to grow 5.5 per cent in fiscal 2024 and 6.5 per cent in fiscal 2025.

Last week, IMF Managing Director Kristalina Georgieva said hailed India for its reforms and said it alone has the potential to contribute 15 per cent of the global growth in 2023. Georgieva said the country continues to attain a 'bright spot' in the world economy, which is predicted to witness a slowdown and likely recession.

For FY 2023-24, IMF has projected India to grow at 6.1 per cent, a bit of slowdown like the rest of the world economy, but way above the global average, Georgieva said.

(With inputs from PTI)