MUMBAI: Accommodative monetary policy and easing funding conditions will help banks grow their assets a tad better this fiscal at 12-13%, over 10.6% in the previous fiscal, an international rating agency has said but has flagged the need to improve deposit mobilisation to maintain the nearly 120 bps improvement in the loan-to-deposit ratio (LDR) in FY25.
The report also sees the impaired loan ratio further falling by 20 bps to 2% in the current fiscal as the legacy bad loans of the system are falling along with higher loan growth.
The RBI has given a lot of legroom for banks to grow faster. While on the regulatory side it has either put off or lessened the cost of meeting the regulations by lowering the provisions requirement for project loans by a fifth to 1-1.25% from the previously hinted 5%, it has putt of the expected credit cost implementation.
On the liquidity side, the central bank has slashed the repo rate by 100 bps between February and June and also lobbed off the CRR requirement by 100 bps to a low 3% in a staggered manner beginning September. In a report, Fitch Ratings also said, the banks strong financial performances in the fiscal 2025 support the standalone credit profiles leaving them in a better position to future growth as banks reported improved asset quality, stronger capital buffers and stable profitability despite the slowest sector loan growth in four years.
“We believe banks can sustain steady performance across most credit metrics in FY26, except for earnings due to cyclical pressures on margins and credit costs.
Accordingly, we also see banks advances improving from 10.6% in FY25, which was the slowest since FY21, to 12-13% in the current fiscal We expect sector loan growth to rebound to 12%–13% in FY26 on accommodative monetary policy and easing funding conditions,” said Saswata Guha, a senior director with Fitch India.
State-run banks’ loan growth of 12.4% was faster than private peers’ for the first time in nearly a decade, as they leveraged more favourable loan-to-deposit ratios, the report said and expects this dynamic to continue for at least another year while private banks manage asset quality pressures in their unsecured portfolios and elevated LDRs.
The impaired-loan ratio fell by about 60 bps to 2.2% in FY25 as bad loans fell by 12%. Although write-offs and recoveries were lower than in previous years due to a shrinking stock of legacy bad loans, they remained sufficient to largely offset bad loan additions. He said the banks rated by his agency outperformed with a 90 bps improvement in impaired loans, maintaining 80% loan loss coverage.
As expected private banks reported higher bad loan formation, though all banks saw net improvements in the year.“We believe the impaired-loan ratios and credit costs for most banks have bottomed. Some banks may still improve given the scope for write-offs in legacy bad loans that will further reduce their bad loan stock. This and higher loan growth may reduce the impaired-loan ratio by 20 bps in FY26.
A renewed focus on secured loans and reducing stress in unsecured segments, helped by easing interest rates and financing conditions, should limit risks of any sharp near-term rise in new bad loans. This and higher loan growth may reduce the impaired-loan ratio by 20 bps in FY26.Low credit costs which at the system level fell to 0.5%, higher recoveries on written-off loans and treasury gains preserved earnings despite a nearly 20 bps decline in net interest margins (NIM) in FY25.
This had the bad loan provisions to pre-provision profits fell by 40 bps to 15%.Yet, operating profit to risk-weighted assets rose improved to 2.8% in FY25, he said but expects this metric to moderate a bit due to the expected 30 bps contraction in NIM and 10-15 bps rise in sector credit costs in FY26, which will partly be offset by better treasury gains and loan growth amid rate cuts.
The average common equity tier 1 (CET1) ratio rose by 40 bps to 14.2%, on internal capital generation and lower risk density. Private banks maintained their advantage with an estimated CET1 ratio of 16.4% which is 13% for state-run banks, but the gap has narrowed from over 500 bps a few years ago due to improved profitability, managed risk density and capital issuance at state-run banks.
Source: The New Indian Express
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