Indian banks may see bad loans falling to decade low of 4% by end of FY24

Indian banks are likely to see a 90 basis points fall in gross non-performing assets (NPAs) to 5% in this fiscal year to March and further improve to 4% by end of March 2024, rating agency Crisil said on Wednesday.

The key indicator of banks' asset quality is likely to improve, "riding on post-pandemic economic recovery and higher credit growth," the agency said in a statement.

Loans of Indian banks jumped 15.5% in the two weeks to Aug. 26 from a year earlier, while deposits rose 9.5%, latest Reserve Bank of India data showed.

The asset quality of the banking sector will also benefit from the proposed sale of NPAs to the National Asset Reconstruction Company Ltd (NARCL), the agency said.

"The steady improvement in corporate asset quality is clearly reflected in leading indicators such as the credit quality of bank exposures," said Krishnan Sitaraman, senior direct and deputy chief ratings officer at Crisil Ratings.

A study of large exposures of banks, constituting more than half of corporate advances, showed the share of high-safety exposures has increased to 77% as on March 2022 from 59% in March 2017, while those to sub-investment grade companies more than halved to 7% versus 17%, Crisil noted.

The asset quality improvement in the corporate segment follows a significant clean-up of bank books in recent years, and strengthened risk management and underwriting.

Meanwhile, the retail segment stayed resilient and gross NPAs are expected to remain rangebound at 1.8-2.0% over the medium term, Crisil pointed out.

"While the impact of increase in interest rates and inflationary pressure on individual borrowers' cash flows will need to be monitored, almost half of the retail loans are home loans, where borrowers have relatively better credit profiles," it said.

"Over the medium term, to avoid a repeat of past asset-quality challenges, it is important that banks don't relax their credit underwriting standards while focussing on faster growth," it added.

(Reporting by Swati Bhat; Editing by Dhanya Ann Thoppil)