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India Banks' Strong Performance Set To Continue

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.


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.

Chart 1



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.

Chart 2



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%.


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.

Table 1

Delinquencies in the retail segment remains low
Product 90+ dpd YoY changes (in bps)
Home loans 1.2% (39)
Loans against property 2.7% (133)
Auto loans 0.9% (39)
Two wheeler loans 1.9% (162)
Personal loans 1.0% (14)
Credit card 2.3% 25
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.


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

Related Research

This report does not constitute a rating action.

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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;

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