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Informist, Monday, Mar. 3, 2025

 

MUMBAI – Expectation of further repo rate cuts by the Reserve Bank of India and easing liquidity will improve banks' loan growth, Fitch Ratings said in a report. As part of banks' move to lower loan-to-deposit ratios, credit growth has moderated to 11% on year as of Dec. 31 from 15% a year ago. Pressure on the sector's loan-to-deposit ratios has eased but private banks remain stretched with an average ratio of 98%, Fitch said. Bank of Maharashtra reported loan growth significantly above its peers, while Union Bank of India and Axis Bank showed a single digit growth.

 

The RBI lowered the policy repo rate for the first time in nearly five years, bringing it to 6.25% from 6.50%, in its February Monetary Policy Committee meeting. As its first move to support systemic liquidity, the regulator reduced cash reserve ratio by 50 bps to 4% in the December meeting. Further, it came up with other measures such as daily variable repo rate, open market operations and dollar/rupee buy/sell swap to inject liquidity. In its latest move, RBI had conducted $10 billion buy/sell swap autcion on Feb. 28. System liqudity fell into a deficit, owing to foreign sell-offs, tax outflows and RBI foreign exchange intervention. Liqudity deficit peaked out at INR 3 trillion in Dec. 

 

Systemic liquidity has been in a deficit since mid-December, owing to tax outflows and RBI's continued intervention in the foreign exchange market with dollar sales to support the Indian rupee from falling. The net liquidity injected by the RBI--a proxy for the systemic liquidity deficit--peaked to INR 3.16 trillion on Jan. 23, highest since Jan. 24, 2024, RBI data showed.

Besides loan growth, banks' other key performance metrics also improved in the past few years, which will provide strong support for their viability ratings, Fitch said. However, the rating agency said that it will evaluate banks' risk profile for further revision in their viability ratings. Fitch's assessment takes into account if banks have developed a resilient risk profile which can support enhanced financial metrics through economic cycles. 

 

A bank's viability rating is a measure of its financial strength and creditworthiness. It's a standalone assessment that doesn't include any external support from the government, parent company, or shareholder.

 

According to Fitch, six of the nine rated Indian banks' risk profiles constrained their viability ratings. "These six banks' asset quality deteriorated significantly and earnings were highly volatile in the previous downturn, highlighting above-average risk appetite and room to improve risk management." 

 

Though banks have calibrated their risk appetities since 2018 through diversifing loan book and focusing on quality corporate exposures, which have reduced bad loans, Fitch believes that "these risk enhancements have yet to be fully tested". This concern is on account of inconsistent risk appetite that bank have through cycles, citing the recent growth in unsecured personal loans. 

 

Banks in 'bb' rated category may see higher viability rating in the near term than those in the 'bb' category as they showed improved key financial metrics, which would in turn contribute to better asset quality. For 'bb' category viability rated banks, which generally perform better through the cycle, ratings may be possible over the medium term, Fitch said. 

 

According to Fitch, Indian banks showed a robust performance for the nine months ended December with return on equity at 1.4% in Apr-Dec, up 10 basis points from corresponding period in the previous year. The impaired loan ratio of the lenders fell by 40 bps to 2.4% in the December quarter compared with the corresponding period in the previous year and expecting further improvement in the next financial year. The sector's loan loss coverage also improved moderately to 79% and credit costs fell slightly to around 0.5% of loans.  End

 

Reported by Christina Titus

Edited by Akul Nishant Akhoury

 

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