Indian banks to benefit from strong domestic economic growth: Moody's

Ukraine conflict will not derail the country's recovery

Global rating agency Moody’s said on Wednesday that India’s economy is back on track after the pandemic and the military conflict will not derail the country’s recovery, creating favorable operating conditions for the country’s banks.

The loan performance and profitability of banks are improving, albeit from a low base. Capital and liquidity levels are stable, Moody’s said.

The global economic fallout from the Russia-Ukraine military conflict will push up inflation and interest rates in India, and create supply constraints.

Indian banks, however, are in better shape now than before the pandemic. Loan quality had deteriorated over the prior decade as a large proportion of the banks’ corporate lending books turned sour.

Corporate stress at that time was linked to multiple factors including slowing economic growth, over-indebtedness and poor governance. Since then, the banks have cleaned their balance sheets and Non-Performing Assets (NPAs) are falling as a result.

The asset-weighted average of rated banks' gross NPL ratios nearly halved to 5.7 per cent as of December 31, 2021 from a peak of 10.3 per cent at end of March 2018.  “We expect NPLs to decline further as banks make recoveries or write off legacy problem debt, while formation of new NPLs will be stable as the economy recovers”, it added.

Loan growth will also help push NPL ratios down by expanding the overall pool of loans, even though new defaults may arise from loans that have been restructured because of pandemic-related economic disruption.

This year, consumer and business confidence is improving and domestic demand is up. Declines in loan-loss provisions as NPLs fall and increases in net interest margins as interest rates rise will boost banks' profitability. The capital, funding and liquidity will be stable and support loan growth, it added.