Despite global uncertainties and trade tensions, asset quality of Indian banks is expected to remain steady as domestic economic conditions remain supportive for growth, global rating agency Moody’s said in a report on Tuesday.
“Government capital expenditure, tax cuts for middle-class income groups to boost consumption and monetary easing will underpin the Indian economy. Also, a low level of dependency on goods trade will shield it from external risks to an extent,” the report said.
It expects the asset quality of the banking sector to remain at 2-3% in the next 12 months as compared to 2.5% as on December end.
The report also said that the measures taken by the Reserve Bank of India have prevented excessive loan growth in the banking system.
In November 2023, the apex bank had increased the risk weights for unsecured retail loans and exposures to non-bank finance companies by 25 percentage points after which, the growth to this sector has slowed down. Moody’s expects the growth in bank lending to the NBFC sector to be in line with overall credit expansion of banks even though the RBI has lowered the risk weights for loans to this sector.
In April, the regulator had issued draft guidelines to curb risks from loans against gold. It proposed to maintain a 5% ceiling for loan-to-value ratios throughout the tenure for both principal and interest for consumption-based loans and all gold loans originated by NBFCs. The rating agency expects these measures to slow down growth in the segment.
Overall, Moody’s expects loans to grow 11-13% in the financial year ending March 2026, compared to an average growth of 17% for the financial years ended 2022-2024. Within bank loans, the quality of wholesale loan book is expected to be better as companies have maintained good profitability and low levels of leverage. On the other hand, the quality of unsecured retail loans would remain weak than that of the secured loans for the next few quarters.
Within secured loans, the quality of housing loans, which is the largest component of retail loans in India, would be stable due to stable employment conditions, adequate loan-to-value ratios and steady appreciation of housing prices on the back of real demand amid urbanisation and a rise of nuclear families, the report said.
The rating agency expects the asset quality of vehicle loans to weaken in some pockets due to slowdown in the sales growth. Impairments of unsecured retail loans, including microfinance loans for low-income households, would remain at a high level in the next few quarters, the report said.
“As delinquency rates for unsecured loans remain high in the coming quarters, small private sector banks will continue to have weaker asset quality than large private banks and public sector banks,” the report said.
Source: The Financial Express
