New Delhi [India], May 13 : Asset quality pressures are subsiding at Indian banks, creating a favourable business environment and bolstering banks' potential and appetite for growth, said Fitch Ratings on Monday.
Bank loans grew by 16 per cent in the financial year that ended in March 2024, similar to 2022-23, and exceeding the 8 per cent CAGR over 2014-15-2021-22.
Large private banks gained significant market share in the last credit cycle and continue to grow rapidly; state banks also returned to brisk growth but lagged large private banks, said the rating agency.
Retail loans, that constitute around 10 per cent of system loans, grew at a 20 per cent CAGR since 2020-21, fuelled by a shift towards unsecured credit to expand margins.
Fitch's assessment of Indian banks' risk profiles also factors in lower transparency in terms of data disclosures on retail underwriting, such as loan-to-value ratio, borrower debt serviceability, credit bureau scores, and recovery rates, than most Asian banking systems.
Further, the rating agency asserted that India's household debt is among the lowest in the world, despite rising to around 40 per cent of GDP from 38 per cent in 2022-23.
Nonetheless, the Reserve Bank of India (RBI) has expressed concerns through various media regarding the fall in the household savings rate, early delinquencies, higher loans per borrower (43 per cent of consumption loan borrowers had three live loans), and surge in consumption loans, even though secured loans dominate banks' loan books.
Banks' interest in SME and farm loans is also rising, notwithstanding above-average impaired loan ratios of 5 per cent and 7 per cent, respectively, in the first half of 2023-24, though off their peaks in the last credit cycle.
"State banks have limited flexibility to avoid these sectors due to their quasi-policy roles, but appetite is also driven by high yields. Banks often rely on government guarantees to mitigate risk in SME loans, but there is room for better visibility on risks covered by these guarantees," Fitch said.
The RBI's recent measures have reinforced safeguards, including improvements in governance, risk management, and reporting.
"It increased risk-weights on certain loan categories in November 2023 to improve buffers against the potential for build-up of risks, applied punitive business restrictions in specific segments for regulated entities in case of supervisory concerns, and is proposing to increase provisioning on project finance. We believe these measures can foster greater caution towards risk-taking, but their effectiveness is not yet proven through the cycle."
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