SINGAPORE (S&P Global Ratings) May 25, 2023--A strong recovery is underway in the Indian banking sector. Lenders have just reported their best results in a decade. S&P Global Ratings expects the sector profitability to stabilize at a healthy level, and that banks' asset quality will continue to improve.
"Indian banks' earnings will likely remain healthy. The sector has improved substantially in the past seven years, from a period when many public-sector lenders were grappling with bad loans," said S&P Global Ratings credit analyst Deepali Seth Chhabria.
Indian banking profitability is benefiting from higher net interest margins and lower credit costs. We estimate systemwide return on average assets (ROAA) at 1.2% for fiscal 2023 (year ending March 31, 2023).
Systemwide ROAA will likely hover around 1.1% in the year for fiscal 2024.
"The formation of new nonperforming loans will remain at cyclical low levels, despite pressure from higher interest rates," said S&P Global Ratings credit analyst Geeta Chugh. "A recovery in written-off accounts is also boosting the profitability of banks."
India's strong economic performance is bolstering the sector. S&P Global Ratings still forecasts the country will grow 6%-7% annually until 2026 at least, making India the fastest growing economy in Asia-Pacific, and the fastest growing large economy globally.
POLARIZATION TO PERSIST
Indian banks' improvements are significant, but they are not universal.
State Bank of India (SBI) and the top private sector banks have addressed their asset quality challenges. However, several large public sector banks are still saddled with a relatively high volume of weak assets, which will result in higher credit losses and hit profitability. The banks are showing improvements in new NPL formation (or slippage) and credit costs, but we expect these lenders to underperform the industry.
POSITIVE STRIDES IN ASSET QUALITY
We estimate that Indian banks' weak assets were around 5.2% of gross loans as on March 31, 2023. This compares with 7.6% as on March 31, 2022.
We define "weak assets" as nonperforming loans (NPLs) plus outstanding standard restructured loans.
The sector's weak loans will decline to 3%-3.5% of gross loans by March 31, 2025, in our view.
Systemwide credit costs will likely remain at about 1.2% for the next couple of years, in line with other emerging markets. The country's economic recovery has contributed to lowering of slippages to around 1.7%, the lowest level in the past 15 years.
This has helped the industry cut its credit cost to 1.1%. The top-four private sector banks and SBI have cut their credit costs sharply, to 0.6%.
Our credit-cost calculations include provisions for NPLs, impairment of investments, provisioning for standard assets, and provisioning for contingencies.
MSME ASSET QUALITY LAGS
The micro, small, and midsize enterprise (MSME) sector and low-income households are vulnerable to rising interest rates and high inflation. We believe that interest rates in India are unlikely to rise materially. This should limit the risk for the country's banking industry.
With sustained economic growth, the residual stress for MSMEs should decline further.
- MSMEs account for about 14.5% of the total advances in the Indian banking sector as of February 2023.
- The government's Emergency Credit Lending Guarantee Scheme played a crucial role in providing support to MSMEs during COVID by ensuring additional liquidity.
- The asset quality in this segment has improved with the NPL ratio dropping to 7.7% as of September 2022, compared with 9.3% in March 2022. However, banks' MSME NPLs remain higher than the systemwide level, which stands at 4%.
CAN RISING UNSECURED LOANS TEST ASSET QUALITY?
Household leverage in India is low but rising. In particular, unsecured personal loans and credit card debt rose by 26% last year and now represent about 9.5% of total loans in the banking system. They pose a risk for incremental NPLs.
The delinquency rate of 90 days past due (90+dpd) has been improving across retail segments, barring credit cards. Despite an increase in 90+dpd for credit cards, the overall level of delinquencies remains within acceptable limits for this product category.
|Delinquencies in the retail segment remains low|
|Product||90+ dpd||YoY changes (in bps)|
|Loans against property||2.7%||(133)|
|Two wheeler loans||1.9%||(162)|
|Consumer durable loans||1.6%||(27)|
|Data for period ended Dec. 31, 2022. YoY--Year-on-year. dpd--Days past due. bps--Basis points. Source: TransUnion CIBIL.|
We believe that underwriting standards for retail loans generally remain healthy. Approval rates for retail products declined during October to December 2022 compared with the previous year, according to TransUnion CIBIL.
A surge in inquiries and to the maintenance of underwriting standards explains this decline in approvals. Approval rates for new-to-credit customers have declined to 24%, compared with 32% a year earlier, reflecting lenders' caution.
Other factors indicating improved creditworthiness of the retail borrowers include:
- A rising level of prime and above-category borrowers. Such borrowers account for 52% of total loans.
- An upgrading of the "Near Prime" segment, with 39% of customers moving to higher-credit tiers. The segment accounts for 23% of total loans.
CREDIT GROWTH TO ALIGN WITH ECONOMY
In the next two years, we expect Indian banks' loan growth to slow to about 12%, from 15% in fiscal 2023, broadly in line with the nominal GDP. The underpenetrated retail-loan market will continue to drive loan growth.
Banks' corporate lending rose in the last fiscal year. Firms have had greater working capital needs and borrowed from banks instead of capital markets--particularly offshore--as bank funding was cheaper.
We expect capex demand to be limited. Currently, capex is more apparent in infrastructure-related sectors such road, airports, and renewables, with follow-on effects for metals, steel, and cement.
The central bank's latest survey suggests that the capacity utilization for manufacturing sector was 74.3% in the third quarter of fiscal 2023 (period ending Dec. 31, 2022). Firms generally plan for expansion when utilization rates are at the 70%-75% level. However, given the global geopolitical uncertainty, we expect private sector capex to be selective.
Indian banks have put in a lot of hard work to repair their balance sheets. This is finally starting to pay off, and the gains are catching an updraft from a strong economy. We expect this outperformance to continue.
Editor: Jasper Moiseiwitsch
- Axis Bank Has The Capitalization To Absorb Quarterly Loss, April 28, 2023
- Indian Banks Have Manageable Exposure To Contagion And Unrecognized Losses, March 21, 2023
- Indian Finance Company Outlook, March 13, 2023
- India Banks Poised For IFRS 9, Feb. 28, 2023
This report does not constitute a rating action.
The report is available to subscribers of RatingsDirect at www.capitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to firstname.lastname@example.org. Ratings information can also be found on S&P Global Ratings' public website by using the Ratings search box located in the left column at www.standardandpoors.com. Members of the media may request a copy of this report by contacting the media representative provided.
|Primary Credit Analyst:||Deepali V Seth Chhabria, Mumbai + 912233424186;|
|Secondary Contacts:||Geeta Chugh, Mumbai + 912233421910;|
|Nikita Anand, Singapore + 65 6216 1050;|
|Amit Pandey, Singapore + 65 6239 6344;|
|Shinoy Varghese, Singapore +65 6597-6247;|
|Ruchika Malhotra, Singapore + 65 6239 6362;|
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.