Moody’s Projects Stable Asset Quality For Indian Banks Despite Global Uncertainty

New Delhi, Jun 4 (KNN) Global rating agency Moody's has projected that Indian banks will maintain steady asset quality despite prevailing global uncertainties and trade tensions, citing supportive domestic economic conditions that continue to foster growth. The assessment was released in a report published on Tuesday.

The rating agency attributes this stability to several key economic factors supporting India's financial sector.

Government capital expenditure initiatives, tax reductions for middle-class income groups designed to stimulate consumption, and monetary easing policies are expected to provide substantial support to the Indian economy.

Additionally, India's relatively low dependence on goods trade is anticipated to provide some protection against external economic risks.

Moody's forecasts that banking sector asset quality will remain within the 2-3 per cent range over the next 12 months, showing improvement from the 2.5 per cent level recorded at the end of December.

This projection reflects the continued resilience of India's banking system amid challenging global conditions.

The report acknowledges the effectiveness of regulatory measures implemented by the Reserve Bank of India in preventing excessive loan growth within the banking system.

In November 2023, the central bank increased risk weights for unsecured retail loans and exposures to non-bank finance companies by 25 percentage points, resulting in a subsequent slowdown in growth within this sector.

Despite the RBI's recent decision to lower risk weights for loans to the non-bank finance company sector, Moody's anticipates that growth in bank lending to NBFCs will align with overall credit expansion patterns across the banking industry.

The rating agency expects these regulatory adjustments to continue influencing lending patterns in the sector.

Recent regulatory developments include draft guidelines issued by the RBI in April aimed at reducing risks associated with loans against gold.

The proposed regulations include maintaining a 5 per cent ceiling for loan-to-value ratios throughout the loan tenure for both principal and interest on consumption-based loans and all gold loans originated by NBFCs. Moody's expects these measures to moderate growth in this particular lending segment.

The overall lending outlook shows a more conservative growth trajectory, with Moody's projecting loan growth of 11-13 per cent for the financial year ending March 2026.

This represents a significant moderation compared to the average growth rate of 17 per cent recorded during the financial years 2022-2024.

Within the broader lending portfolio, wholesale loan book quality is expected to outperform other segments, supported by strong corporate profitability and maintained low leverage levels among businesses.

Conversely, unsecured retail loans are projected to exhibit weaker quality compared to secured loans over the coming quarters.

Housing loans, which constitute the largest component of retail lending in India, are expected to maintain stable quality.

This stability is attributed to consistent employment conditions, appropriate loan-to-value ratios, and steady housing price appreciation driven by genuine demand from urbanisation trends and the increasing prevalence of nuclear families.

The vehicle loan segment presents a mixed outlook, with Moody's anticipating quality deterioration in certain areas due to slower sales growth.

Unsecured retail loans, including microfinance products targeting low-income households, are expected to continue experiencing elevated impairment levels throughout the next several quarters.

The report highlights a distinction in asset quality performance across different banking categories.

Small private sector banks are expected to continue experiencing weaker asset quality compared to their larger private sector counterparts and public sector banks, primarily due to persistently high delinquency rates in unsecured lending portfolios during the projected period.

(KNN Bureau)