MUMBAI: Retaining the stable outlook for domestic banks, international rating agency Moody’s has warned that a prolonged conflict in West Asia could upend their stability, even though it expects the crisis to blow over soon.
Over the past few years, most banks have cleaned up their books, leading to best-ever asset quality with gross non-performing assets falling to under 2.5% and on a net level under 0.5% and the overall growth has been good.
The outlook for banks remains stable now, Moody’s said Tuesday, as it expects the asset quality cycle to remain benign and credit to grow in the low-to-mid teens next financial year. But the ongoing Iran war will weigh on the road ahead.
However Moody’s and its domestic subsidiary Icra hope the West Asia conflict will be resolved sooner rather than later. But if it gets prolonged for a few months, and oil prices remain elevated, there will be repercussions for the economy and, in turn, banks, they warned.
Elevated energy prices for the long term will increase the cost of doing business for many companies which will also pull down demand and, in turn, the economy, Amit Pandey, vice-president, financial institutions group at Moody’s Ratings told reporters here Tuesday.
Since the country meets as much as 85% of its oil and gas demands from imports, sustained high prices will also put pressure on the current account deficit, and put the rupee under pressure and will force the Reserve Bank to increase repo rates to attract capital, and that will have a bearing on borrowers. In such a scenario, foreign inflows may also tend to slow further, he said further.
“So, from a very good growth, moderate inflation and low interest rate trajectory, you tend to see a slowdown in growth, high inflation and higher interest rates. Business will slow down, which will have an implication for NPAs and net margins among other key things,” said Pandey.
However they did not offer a view on the impact of the conflict on remittances from West Asia, which is the second largest source of inward remittances, saying it is too early to assess.
On the other hand, if the war ends soon, there are several bright spots for the domestic banking sector. Not taking the conflict into account, Moody’s has projected GDP to grow 6.4% in FY27 as structural reforms such as the GST rate cuts and higher income tax rebates will continue to boost consumption.
Supported by economic growth and low levels of leverage among borrowers, NPAs are expected to remain low. Corporate asset quality remains strong, and while the quality of retail and small and medium enterprises loans is stable as of now.
Banks net interest margins are also expected to improve as last year’s rate cuts start reflecting in banks’ deposit rates, noted Moody’s.
From the perspective of non-banking finance companies, the gold loan segment has clocked accelerated growth in the last couple of years, as gold prices have surged amid global uncertainties. After growing 31% last fiscal, gold loan assets under management are expected to surge 60-62% this fiscal, Karthik Srinivasan, senior vice-president & group head-- financial sector ratings at Icra Ratings said, adding he sees gold loan growth moderating to 17-19% next financial year.
The vehicle loans segment is also expected to report steady growth, clocking 13-15% growth this year and around 14-16% next year. Home loans are also seen growing at a steady 13-15% growth this year and the next, although the loan against property segment is expected to see a little moderation from around 20-22% to 19-21%, he added.
“Loan against property (LAP) will still remain one of the faster growing segments, but clearly we would see some moderation, largely driven by the slowdown in the small ticket LAP, given that we are seeing some stress in the last 12-18 months. Some risk averseness, credit underwritings are being tightened across the board, which would result in some slowdown there,” noted Srinivasan.
The micro-finance sector, which had been in trough since last fiscal, continues to see some challenges, but disbursements have resumed, and the AUMs are expected to largely hold up, noted Srinivasan. After declining 11% in 2024-25, the sector is expected to see a 0-2% growth this year, and possibly then picking up on a low base to 15-17%.