Stable outlook for Indian bank assets despite global risks

Asset quality of Indian banks is expected to remain stable, according to Moody’s, as domestic growth is supported by government spending, tax cuts, and monetary easing. The agency highlights that RBI’s regulatory actions—like tighter norms for unsecured and gold-backed loans—are curbing risky lending.

Despite ongoing global uncertainties and trade tensions, the asset quality of Indian banks is expected to remain stable, supported by strong domestic economic conditions, according to a report by global rating agency Moody’s. The agency highlighted that government-led capital expenditure, tax relief for middle-income groups to boost consumption, and continued monetary easing will act as key growth enablers. Additionally, India’s relatively low dependency on goods trade will cushion it from external economic shocks to some extent.

Moody’s forecasts the banking sector’s asset quality to remain within the 2–3% range over the next 12 months, compared to 2.5% recorded at the end of December. The agency noted that measures by the Reserve Bank of India (RBI) have helped prevent an unsustainable rise in loan growth. One such measure was the RBI’s decision in November 2023 to raise the risk weights for unsecured retail loans and exposures to non-banking financial companies (NBFCs) by 25% points. This move has significantly slowed lending to these segments.

Moody’s anticipates that future growth in bank lending to NBFCs will align with the broader pace of credit expansion in the banking system. This is despite the RBI later reducing risk weights for certain loans to the NBFC sector. In April, the RBI issued draft guidelines aimed at managing risks from loans against gold. It proposed a “5% ceiling for loan-to-value ratios throughout the tenure for both principal and interest for consumption-based loans and all gold loans originated by NBFCs.” Moody’s expects such regulatory measures to moderate growth in this segment.

Overall, the report projects that bank loans will grow at a slower pace of 11–13% in the financial year ending March 2026, down from an average growth of 17% witnessed between FY22 and FY24.

In terms of loan segments, the quality of wholesale loans is expected to remain strong due to “good profitability and low levels of leverage” among borrowing companies. Conversely, the quality of unsecured retail loans will continue to lag behind that of secured loans for the next few quarters.

Among secured loans, housing loans—the largest component of retail loans in India—are expected to retain their stability. This is attributed to “stable employment conditions, adequate loan-to-value ratios and steady appreciation of housing prices on the back of real demand amid urbanisation and a rise of nuclear families.”

However, the agency cautioned that the asset quality of vehicle loans could face pressure in certain areas due to a slowdown in sales growth. Additionally, impairments in unsecured retail loans, including microfinance loans provided to low-income households, will likely remain elevated in the near term.

“As delinquency rates for unsecured loans remain high in the coming quarters, small private sector banks will continue to have weaker asset quality than large private banks and public sector banks,” the report said.