Credit quality of Indian banks will remain resilient despite a challenging environment globally owing to strong domestic demand, improving credit conditions for borrowers, and strengthened solvency and funding, Moody’s Investor Services said.

Credit conditions have improved led by significant reduction in banks’ legacy problem loans over the past three years, enhanced corporate financial health and subsiding NBFC stress.

Moody’s Indian affiliate ICRA expects gross NPA ratios of banks to improve to a decade-best of 2.63 per cent for FY24 compared with 3.96 per cent in March 2023. Net NPA ratios are seen improving to 0.83 per cent from 0.97 per cent a year ago.

“Corporate asset quality remains strong, which, coupled with the stable performance of retail asset quality, will help reduce fresh slippages,” says Karthik Srinivasan, Senior Vice-President and Group Head, ICRA, adding that slippage rate of 2 per cent for FY23 was the lowest since FY12.

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Capital adequacy

“Banks globally are facing liquidity pressures amid tighter monetary policy, outflows of excess liquidity built up during the coronavirus pandemic…Indian banks, however, have strong domestic funding franchises and ample liquidity to support growth in their loans in line with India’s strong economic conditions,” said Alka Anbarasu, Associate MD, Moody’s.

Capitalisation levels have also improved, Moody’s said, pegging average return on tangible assets at 1.0-1.2 per cent over the next two years and asset growth at around 15 per cent.

While loan growth is likely to moderate to 11-11.7 per cent in FY24 from 15.5 per cent in FY23, incremental credit growth is projected to be at ₹15-16 lakh crore — the second-highest increase for the banking sector on record, ICRA said.

Improved liquidity conditions are expected to result in a decrease in total bank issuances to below ₹90,000 crore from the record ₹1.1-lakh crore in FY23. Additional tier-I issuances are seen stable at ₹30,000-33,400 crore, driven by PSU banks. Tier-II issuances are likely to moderate from the peak of ₹49,600 crore in FY23, along with a few infrastructure bonds.

Margins vs costs

In a separate note, Crisil Ratings said that NIM (net interest margin) of banks have peaked and are expected to compress 10-20 bps to 3.0- 3.1 per cent in FY24. NIMs had expanded by around 30 bps in FY23 to 3.2 per cent due to differential pace of loans and deposit rate changes.

The compression will be led by some rise in deposit rates as 30-35 per cent deposits come up for re-pricing at higher rates, said Krishnan Sitaraman, Senior Director and Chief Ratings Officer, Crisil, adding that the shift from CASA to term deposits will continue as overall deposit costs rise.

However, lower credit costs on the back of benign asset quality, will offset some of the impact and support profitability. Credit cost is estimated to have dropped to 0.7 per cent in FY23 from the around 1.8 per cent levels seen between FY16 and FY20, and are expected to fall further, Crisil said, pegging overall banking sector profitability at around 1.1 per cent for FY24.

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