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Informist, Thursday, Nov. 14, 2024

 

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--S&P:Structural improvements, econ prospect to aid India fincl institutions 
--S&P: Higher demand, stronger bank capitalisation can boost loan growth 
--S&P: RBI's regulatory clampdown to strengthen fincl system in medium term 
--S&P: India's good econ growth prospects to support banks' asset quality 
--S&P: Unsecured personal loans could contribute to incremental NPAs 
--S&P: India bks deposit growth may lag credit, weaken credit-deposit ratios

 

NEW DELHI – The asset quality of Indian banks is likely to improve going ahead, supported by the country's "good economic growth prospects", S&P Global Ratings said on Thursday. The rating agency projects India's GDP to grow 6.5%-7.0% annually between FY25 and FY27, driven by infrastructure spending and private consumption. 

 

S&P projects that the banking sector's weak loans will decline to about 3.0% of gross loans by March, compared to its own estimate of 3.5% as of Mar. 31, 2024. "This is on the back of healthy corporate balance sheets, tighter underwriting standards, and improved risk-management practices," the rating agency said.

 

Underwriting standards for retail loans in India are healthy, and delinquencies in this segment remain manageable, S&P said. However, the rating agency warned that unsecured personal loans, which have grown rapidly in recent times, could contribute to incremental non-performing loans.

 

S&P said that higher demand, along with stronger bank capitalisation, should boost bank loan growth. Loan growth is likely to be slightly higher than nominal GDP growth this year, led by growth in retail loans, S&P said. Corporate borrowing has gained momentum, but uncertain external conditions might delay capital expenditure-related growth, S&P said. 

 

In contrast, deposits may struggle to keep pace, which would weaken the credit-to-deposit ratios of Indian banks, the rating agency said. "Despite this, banks' overall funding profiles should remain sound," it said. Banks will face competition for deposits, which, along with a shift to higher interest-bearing term deposits, will squeeze net interest margins to 3% this year from 3.2% in FY24, S&P said.

 

It said that the Reserve Bank of India's regulatory clampdown would strengthen the financial system in the medium term. Structural improvements and good economic prospects will also support the resilience of India's financial institutions, the rating agency said. 

 

"The central bank is becoming more vocal and imposing heavy penalties. We believe increased transparency will enhance compliance and governance practices and curtail lenders' over-exuberance, but compliance costs will rise," the rating agency said.

 

It expects the credit costs of Indian banks to rise marginally to 0.9% this year from 0.8% in FY24, but still remain below the long-term average of 1.5%. "Normalisation of credit costs and a possible dip in margins could lower the return on average assets to about 1.2% in fiscal 2025 (FY25), but it would still be comparable with peers'," S&P said.  End

 

Reported by Shubham Rana

Edited by Avishek Dutta

 

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