Indian Banks' Asset Quality to Remain Robust Amid Global Risks, Says Report

Indian banks are expected to have stable asset quality in the next twelve months, and system-wide non-performing loans (NPLs) are likely to remain between 2 and 3 per cent, according to a report by Moody's Ratings on India's banking sector. The report indicates that the stability will be aided by India's domestic economy, despite prevailing uncertainties in the global scenario.

Moody’s also said in the report that the economy's growth is also likely to act as a support to the banking system. Notably the economic growth has been driven by enhanced government capital spending, steady consumption, and supportive monetary policy.

Apart from these factors, the banking sector’s minimal exposure to disruptions in world trade is also likely to assist Indian banks in fending off anticipated shocks.

Domestic Demand Is A Robust Buffer

In contrast to export-driven economies, India's modest reliance on international goods trade is likely to provide some insulation against global economic shocks like trade wars and supply chain turmoil. Excessive government capital expenditure and middle-class income tax relief are contributing to sustaining household spending and private investment.

With domestic consumption remaining robust and inflation seemingly in check, interest rates are likely to soften further. Reduced borrowing costs will sustain credit growth while maintaining the ability of borrowers to repay at current levels. This situation is expected to reduce the new bad loans.

Corporate Loans Remain Healthy

Moody's said in the report that corporate borrowers, particularly large and mid-cap companies, are expected to exhibit robust balance sheets. Low debt levels and healthy margins are likely to aid stable repayments in wholesale loan portfolios. Consequently, banks with a greater proportion of wholesale lending are likely to have strong asset quality.

Wholesale loans are a major constituent of Indian bank loan books, apart from retail credit and agricultural credit. The robust performance of corporate borrowers is expected to offset the risks unfolding in other segments.

Unsecured Loans: A Cause Of Concern

In spite of the overall benign tone, the report cautions that unsecured retail loans are still at risk. The proportion of new non-performing loans in this space has risen in recent quarters, whereas secured retail loans like home loans continue to stay on track.

The trend is expected to pose challenges for small private sector banks, which have a larger percentage of unsecured retail lending. They could experience more stress on the quality of assets compared to large private and public sector banks.

Two-Wheeler Loans Showing Signs of Early Stress

Among the retail segments, two-wheeler loans are also reporting signs of stress. The high demand during the pandemic years has now slowed down, and repayment delays are starting to appear. According to the report, as the growth in vehicle sales slows, the asset quality of two-wheeler loans may deteriorate and may need to be monitored more closely by lenders.

The Overall Outlook Remains Positive

Although there are areas of risk, especially in unsecured retail credit, the overall Indian banking system is positioned well to withstand international economic currents. With sound domestic fundamentals, a supportive policy environment, and responsible lending, Indian banks should continue to be stable in the coming months as per Moody’s.