Global rating agency Moody's Investors Service on March 1 said the asset quality of Indian banks is likely to improve going ahead.
"The asset-weighted average of rated banks' gross NPL ratios dropped to 4 percent as of 30 September 2022 from a peak of 10 percent at the end of March 2018," Moody's analysts said in a report about non-performing loans.
The new NPL formation rate would stay low, helped by strong economic growth. The quality of corporate loans would be stable, it said.
The growth in corporate loans has been modest in the past few years because banks have tightened their underwriting criteria. The asset quality will be stable.
The report said retail loans also performed well despite coronavirus-induced stress for individuals, helped by improvements in banks' underwriting and a low level of household leverage in India compared to in many other Asian countries.
ROTA to hold steady at 1.0-1.2%
Returns on tangible assets (ROTAs) of Indian public and private sector banks will hold steady at 1.0-1.2 percent over the next 12-18 months, the report said.
As financial conditions improved materially in the past five years, loan-loss provisions decreased in line with improvements in asset quality, it said.
The loan-loss provisions, however, will not drop further after reaching a decade-low of 0.8 percent of gross loans at the end of September 2022.
Credit demand in the next 12-18 months
According to Moody's outlook report, credit demand from private corporates will stay strong as inflation increases the need for working capital and as companies turn to domestic banks to meet their financing requirements at lower costs.
"This will help sustain recovery in credit growth, which started in fiscal 2023, at around 15 percent," the report said.