Record net incomes at India's largest banks to boost asset quality

Large Indian banks are expected to improve their asset quality in the current fiscal year that began April 1 as record profits allow them to strengthen their balance sheets and underwriting standards.

The cumulative nonperforming loans of the three largest private banks and three public banks fell to 2.483 trillion Indian rupees in the 12 months to March 31, down 11% from 2.791 trillion rupees a year earlier, according to data compiled by S&P Global Market Intelligence. The figures include an increase in HDFC Bank Ltd.'s nonperforming loans by 56.8% to 311.73 billion rupees after its merger with the parent, Housing Development Finance Corp. Ltd.

Under the central bank's baseline scenario, the average gross nonperforming assets (NPA) ratio of Indian banks may improve to 3.1% by September from 3.2% a year earlier, the central bank wrote in its biannual Financial Stability Report released Dec. 28. A central bank stress test exercise also showed that commercial lenders have sufficient buffers in place and their capital ratios will remain above the regulatory minimum even under adverse stress scenarios.

"The banking sector's asset quality is improving, buoyed by a confluence of supportive structural and cyclical factors," said Deepali Seth Chhabria, a banking analyst at S&P Global Ratings.

Record profits

All major Indian banks posted record profits in the financial year ended March 31, driven by high lending growth and improving asset quality, which helped lenders increase their net interest income and reduce credit costs.

The State Bank of India, India's largest bank by assets, reported a 20.6% increase in net income, rising to 670.85 billion rupees from 556.48 billion rupees a year ago. The bank registered a 15.2% year-over-year credit growth during the same period. HDFC Bank's full-year income rose 39.3% to 640.42 billion rupees. Other major lenders including Bank of Baroda Ltd., Punjab National Bank, Axis Bank Ltd. and ICICI Bank Ltd.also posted record-high net income gains, S&P Global Market Intelligence data shows.

Banks' overall advances rose during the financial year, and record profits at India's biggest lenders boosted return on average equity (ROAE), the data shows. Axis Bank posted the largest increase in ROAE, up 997 basis points to 18.50%. Punjab National Bank logged a 524-basis-point ROAE gain to 8.56%.

Asset quality

The gross NPA ratio at Indian banks stood at 3.2% as of September 2023, an 11-year low, according to the Reserve Bank of India. Still, the central bank raised concerns about the rapid rise in unsecured personal loans, the fastest-growing segment of advances.

Retail loans, which include housing loans, consumption loans to buy durables, auto loans, credit cards and educational loans, have increased faster than loans to large businesses since the COVID-19 pandemic. The proportion of retail advances increased to 35% in 2023 from 25% in 2007, according to a Jan. 18 research paper by central bank employees.

"Both the secured and unsecured components have registered growth rates higher than overall bank credit growth," the paper noted, adding that the "surge in retail credit" continued even after the central bank removed temporary measures to aid households during the pandemic.

"We believe underwriting standards for retail loans generally remain healthy and the overall level of delinquencies remains within acceptable limits for this product category," Chhabria said.

Credit growth to moderate

India's GDP is likely to grow 7.0% in the fiscal year that started April 1, according to the Reserve Bank of India, allowing the South Asian nation to remain the fastest-growing major economy in the world. But credit growth will likely ease from the 16.3% year-over-year increase recorded at the end of March, according to central bank data. Credit growth at private sector banks stood at 19.3%, while public sector banks recorded 14.7% loan growth.

Chhabria expects system-level credit growth to moderate to 14% in the new fiscal year. "Combined with tight liquidity, the central bank's recent actions, including ruling on applying higher risk weights to unsecured personal loans, are likely to limit credit growth in fiscal 2025," Chhabria said.

The central bank increased risk weights on unsecured personal loans, credit cards and lending to nonbank financial companies by 25 percentage points in November 2023. On May 3, the Reserve Bank of India proposed guidelines on project financing, requiring lenders to set aside 5% of outstanding exposures during the construction phase of projects, up from 0.4% currently. Once the project becomes operational, the requirement will drop to 2.5%.

As of May 28, US$1 was equivalent to 83.19 Indian rupees.