Indian banks’ weak loans (better known as non-performing assets or NPAs) is projected to drop to 4.5 per cent at the end of Fiscal Year 2023-24, and to 3.5 per cent at the end of Fiscal Year 2024-25, S&P Global said on Thursday. It does not expect interest rates to rise much in the near future.

NPA refers to a loan account whose principal or interest is due for a period of three months or more.

“We project the banking sector’s weak loans will decline to 3-3.5 per cent of gross loans by March 31, 2025, on the back of a structural improvement, including healthy corporate balance sheets, tighter underwriting standards, and improved risk-management practices,” S&P Global Ratings said in its report on Global Banks’ Country-By-Country Outlook 2024 titled ‘Forewarned is Forearmed.’ The bank assumes that slower global growth and external demand will weigh on economic activity and could fuel further inflation. However, “given that India is domestically oriented, we expect economic growth to be less affected,” it said.

Further, it forecast that credit cost would normalise to 1.2 per cent for the next couple of years.  After raising the policy repo rate by 2.5 per cent, the RBI Governor-led Monetary Policy Committee (MPC) has hit the pause button in four successive reviews, and is expected to continue the same when it meets next month.

Bad loans ratio at pre-AQR level: CARE Ratings

S&P Global also does not expect interest rates to go up further in the near term. “The small and mid-size enterprise sector and low-income households are vulnerable to rising interest rates and high inflation. But we believe interest rates in India are unlikely to rise materially. This should limit the risk for the banking industry,” it said.

High growth in personal loans

Meanwhile, the report echoed the sentiments of RBI Governor Shaktikanta Das, when he cautioned against the risk of ‘very high growth’ in personal loans and urged lenders to strengthen their internal surveillance mechanisms and address the build-up of risks. “Unsecured personal loans have grown rapidly and could contribute to incremental NPLs. We believe underwriting standards for retail loans generally remain healthy and the overall level of delinquencies remains within acceptable limits for this product category,” S&P Global said.

The agency expects, loan growth in the next few years to be in line with nominal GDP, with retail loan growth exceeding corporate loan growth. Corporate borrowing is gaining momentum, but the uncertain environment may delay capital expenditure-related growth. Deposits may find it hard to keep pace, thus weakening credit-to-deposit ratios. “Despite this, banks’ funding profiles should remain sound, supported by a strong deposit franchise. Lagged repricing of deposits, rising competition for deposits and a shift from low-yielding CASA (Current Account Savings Account) to higher interest-bearing term deposits will squeeze NIMs (net interest margins) to 3 per cent in fiscal 2024 and 2.9 per cent in fiscal 2025.

The report noted that the system’s return-on-average assets was adequate at 1.1 per cent, but polarisation would persist. State Bank of India and the leading private-sector banks have largely addressed their asset-quality challenges. Many public-sector banks still carry a relatively high volume of weak assets, which will result in higher credit losses and hit profitability; their performance lags that of the industry. Similarly, “we expect a mixed-bag performance for finance companies (fincos). The asset quality of these fincos is often weaker than that of major private sector banks,” it said.

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