India's banks, NBFCs well-placed to ride on strong economic growth, says Moody's

Moody's and its domestic subsidiary expect the banking sector performance to remain strong with healthy profitability primarily driven by strong loan growth and a favorable credit environment.
India's banks, NBFCs well-placed to ride on strong economic growth, says Moody's

MUMBAI: The credit quality in the country’s financial system has improved in recent years with record-high profitability of over Rs 3 trillion in FY24, low delinquencies and domestic-oriented funding underpinning stable credit ratings, said Moody's on Wednesday, adding that the system is well-placed to ride on the strong economic growth going ahead with strong credit growth.

“Banks and non-bank finance companies (NBFCs) are well placed to seize opportunities from the country’s strong economic prospects through higher lending in sectors such as infrastructure, energy transition, manufacturing, small businesses and retail. The system wide credit quality has strengthened over the past three-four years which has seen in the record-high profitability, low delinquencies and stable domestic-oriented funding, underpinning their stable credit ratings,” Moody’s and its domestic subsidiary Icra Ratings said here.

The report also noted the improved capitalization of financial institutions with healthy internal accruals and capital raising from buoyant debt and equity markets.

Moody’s expects loan growth of 12-14 percent over the next 12-15 months as loans grow in line with deposits. But it sees the systemwide net interest margins softening as banks reprice maturing deposits at higher rates to reflect previous increases in interest rates. Yet, the systemwide return on assets will remain healthy with low loan-loss provisions despite a slight increase from cyclically muted levels, while banks’ capitalization will remain stable.

“For the financial institutions, leadership in technology adoption as well as their risk management, governance, customers’ experience and balance-sheet buffers will separate winners from losers over the next two to three years,” says Amit Pandey, a Moody’s vice-president and a senior analyst.

The agencies expect the banking sector performance to remain strong with healthy profitability primarily driven by strong loan growth and a favorable credit environment. The evolution of systemic liquidity and deposit growth will continue to drive credit growth for banks amid strong demand. They estimate that despite a moderation in growth, credit is set to increase Rs 19-20.5 trillion in the fiscal 2025 which would be the sector's second-highest increase.

On the corporate sector, the agencies said the corporate asset quality continues to remain stable; however certain asset classes in retail unsecured segments are seeing increased stress. "Falling credit flow could further pressure asset quality in these segments, but overall fresh slippages and credit costs will remain benign for banks," says Karthik Srinivasan, Icras’s senior vice-president.

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The agencies see asset quality continue to improve, with headline gross non-performing advances and net NPAs declining to their lowest levels in over a decade at 2.30 percent and 0.55 percent, respectively, by March 2025, from 2.81 percent and 0.64 percent, respectively as of March 2024.

On the NBFC sector, the agencies see overall growth moderating, especially in the non-mortgage retail loan segment following the high growth rates seen in the past two fiscal years. Personal and consumption loan segments, which grew at steep rate in the previous two fiscal years, will experience relatively muted growth in the current fiscal year in light of regulatory actions on such loans.

The assets under management of NBFCs (excluding housing finance companies and NBFC infrastructure finance companies) will likely grow at a relatively muted but healthy rate of 17-19 percent in fiscal 2025, down from 23-24 percent in fiscals 2023 and 2024. This will weaken their asset quality and earnings, with nonperforming assets increasing by up to 30 basis points from March 2024 and earnings declining 20-40 basis points from fiscal 2024, as growth slows and the expectation of tighter liquidity keeps cost of funds elevated. This will the overall growth moderating to 12-14 percent in fiscal 2025.

On the corporate sector, the agencies said despite higher capex for capacity expansion, inorganic growth, refinancing and working capital needs, along with shareholder payments, their credit metrics will remain stable amid easing inflationary pressures and steady interest rates

"While domestic liquidity and companies' internal cash flow can cover a large proportion of their capital needs, offshore funding will remain key despite its lower share," says Vikash Halan, a Moody's managing director.

Moody's considers that corporates have capacity to incur additional debt to meet funding needs. Over the past decade, the corporate sector has steadily cut debt to 55 percent of GDP from 72 percent while leverage has remained stable for rated companies.

On the country’s energy transition, Moody's said solid growth in the renewable energy capacity will continue, with the sector requiring up to $215 billion of investment over the coming years to meet transition targets.

The agencies estimate that the target of 500 gw of renewable energy capacity by 2030 will require $190-215 billion of investment over the next seven years, while another $150 billion-$170 billion of investment will be required for electricity transmission and distribution as well as energy storage.

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