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Moody’s expects Indian banking sector to stabilise on economic rebound

Global credit rating agency Moody’s expects India‘s banking sector to stabilise this year riding on a gradual economic recovery, improving consumer and business confidence, the decline in bad loan provisions and better margins, despite the uncertainties posed by the Russia-Ukraine conflict.

Fundamentals for the sector will improve especially due to India’s continuing economic recovery, which Moody’s expects will grow at 8.4% in the fiscal ending March 2023, down from 9.3% in the year ended March 2022. “Increasing corporate earnings and easing funding constraints for non-bank finance companies, which are significant borrowers from banks, will support loan growth. We expect growth in bank loans to accelerate to 12%-13% in fiscal 2023 from 5% in fiscal 2022,” Moody’s said.

Bad loan ratios will decline because of recoveries or write-offs of legacy problem loans while the formation of new stressed loans will stabilise as the economy recovers.

“Loan growth will help push NPL ratios down by expanding the overall pool of loans, even though new defaults may arise from loans that have been restructured because of economic disruptions from the pandemic. The quality of corporate loans will be stable, supported by growth in earnings and a clean-up of legacy problem loans to corporates, while risks will linger in loans to retail borrowers and small and medium-sized enterprises because relief measures for them have somewhat masked stress among them,” Moody’s said.

Growth in pre-provision earnings and decline in loan-loss provisions will result in improvements in profitability, which will also be supported by gradual increases in interest rates as banks will be able to pass on higher rates to borrowers.

The only risk flagged by the rating agency is the global economic fallout from the Russia-Ukraine military conflict, which could fuel inflation because of rising oil prices and an impact on the value of emerging market currencies like the rupee.

Moody’s however expects funding and liquidity to be stable for both public and private sector banks.

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