Banks' asset quality to be stable amid global uncertainty: Moody's

Moody's expects Indian banks to maintain asset quality despite global economic tensions, with NPAs remaining in the 2-3 per cent range over the next 12 months

Global rating agency Moody’s today said the Indian banking sector will be able to broadly preserve asset quality despite trade tensions posing risks for the global economy. Domestic economic conditions remain supportive of growth, and the non-performing loan (NPL) ratio is expected to stay at the 2–3 per cent level over the next 12 months, the agency said. The NPL of the Indian banking system stood at 2.5 per cent at the end of December 2024.

 

Moody’s, in a statement, said the government’s capital expenditure, tax cuts for middle-income groups to boost consumption, and monetary easing will underpin the Indian economy. Also, a low level of dependency on goods trade will shield it from external risks to an extent. This will help banks preserve their asset quality. 

 

 

While overall asset quality performance would remain stable, there will be divergence in loan performance across different product types and lenders. Wholesale loans will continue to perform well as companies maintain good profitability and low levels of leverage, it added.

 

Wholesale loans are a key part of Indian banks’ loan books, along with retail and agriculture loans. The quality of unsecured retail loans will remain weaker than that of secured ones for at least the next few quarters.

 

New NPL formation rates for secured retail loans have broadly stayed low, while those for unsecured loans have risen in recent quarters. As this trend persists, small private sector banks will continue to have weaker asset quality than large private banks and public sector banks, it added. 

 

The Reserve Bank of India’s (RBI’s) macroprudential measures have prevented excessive loan growth in the banking system. It raised risk weights for unsecured retail loans and exposures to non-bank finance companies (NBFCs) by 25 percentage points in November 2023. Growth in these two types of loans has slowed markedly because of the central bank’s measures.

 

While the RBI lowered risk weights for loans to NBFCs effective April 2025, we expect growth in bank lending to the sector to be in line with overall credit expansion, it added.