Record profits at India's largest banks likely to drive asset quality improvements in 2024-25: S&P

With record profits, low non-performing assets and strong credit growth, the financial year 2023-24 was among the best years for some of the largest banks in India in some time. These banks are expected to further improve their asset quality in the current financial year as the record profits will allow them to strengthen their balance sheets and underwriting standards, believes S&P Global.

"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," it said.

The rise in advances in 2023-24 and record profits boosted return on average equity (ROAE), noted S&P.

The cumulative nonperforming loans of the three largest private banks (HDFC Bank, ICICI Bank and Axis) and three public sector banks (State Bank of India, Bank of Baroda and Punjab National Bank) declined to Rs 2.48 lakh crore in the 12 months to March 31, down 11 per cent from Rs 2.79 lakh crore a year earlier, according to data compiled by S&P Global Market Intelligence.

The Reserve Bank in its financial stability report in December too had noted that under the baseline scenario, the gross NPAs (non-performing assets) of banks are expected to improve to 3.1 per cent by September 2024 from 3.2 per cent, which itself was an 11-year low.

"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.

India has been among the fastest-growing large economies, which has boosted credit growth for banks. In particular, retail loans (such as home loans, auto loans, personal loans and credit cards) have grown at a much faster clip than loans to businesses, so much so that the RBI last year raised risk weights on such loans.

Chhabria believes underwriting standards for retail loans generally remain "healthy" and the overall level of delinquencies remain within acceptable limits for this product category.

India's GDP growth is expected to remain strong in 2024-25 too; the RBI estimates the economy to grow 7 per cent this year. However, credit growth is expected to slow down, compared with last year's high growth rate of 16.3 per cent.

Apart from raising risk weights on personal loans in November 2023, earlier this month, the Reserve Bank proposed new guidelines related to project financing. Under these draft guidelines, lenders will have to set aside 5 per cent of outstanding exposures during the construction phase of projects, significantly higher than the 0.4 per cent currently.

Chhabria expects credit growth to moderate to 14 per cent this 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," she noted.