S&P Global: Banks’ NPL ratio expected to drop to 5-5.5% by March 2024, says S&P Global

S&P Global Ratings said on Thursday that banks’ non-performing loans are expected to decline to 5-5.5% of total advances by March 2024. According to the latest Financial Stability Report released by the RBI, gross non-performing assets (GNPA) fell to a six-year low of 5.9% in March 2022.

“We expect weak banking sector lending to decline to 5-5.5% of gross lending by March 31, 2024. Similarly, we expect borrowing costs to stabilize at 1.5% for the year. 2023 and will further normalize to 1.3%, making credit costs comparable to other emerging markets and India’s 15-year average,” the rating agency said in a report.

The small and medium-sized business sector and low-income households are vulnerable to rising interest rates and high inflation, but it expects those risks to be limited, the agency added.

With an economic recovery, the residual stress for these segments should start to ease, he said, adding that NPL recoveries should also pick up momentum.

He also said that India’s economic growth outlook is expected to remain strong over the medium term, with GDP growing by 6.5-7% annually in the fiscal years 2024-2026.

The economy’s higher long-term growth rate relative to its peers highlights its historic resilience. India’s wide range of structural trends, including healthy demographics and competitive unit labor costs, work in its favour, he noted.

Furthermore, he added, the government is likely to continue to support the system and it is very likely that the government will continue to support public sector banks, despite plans to privatize two such banks.

Over the next few years, according to the report, loan growth is expected to remain somewhat in line with the path of nominal GDP, and loan growth to the retail sector will continue to outperform the corporate sector.

Corporate borrowing is also accelerating, with working capital needs and capital spending growth driving demand, he said.

Still, if risk management does not improve, the coming growth cycle could produce a new crop of bad loans, the agency added.

Lower credit costs and a pickup in loan growth should support banks’ earnings recovery, he said.

Improved profitability should increase capital formation. Capitalization has increased in recent years due to capital raising from banks and government capital injections into public sector banks, he noted.

Capital adequacy ratios are comparable to those of their international counterparts for major Indian private sector banks, although they are lower for public sector banks, S&P Global added.

Sallie R. Loera