S&P Global Ratings on Tuesday raised its assessment of India’s banking sector, citing a ”strong recovery” underway in the Indian financial sector.
A weak financial sector has been cited as a weight on India’s sovereign ratings, along with the government’s high debt-to-GDP ratio, which has kept the country’s rating at one notch above ”junk” grade.
India’s ’Banking Industry Country Risk Assessment’, an indicator of an economy’s financial sector, has been raised one notch to 5 from 6 earlier, the rating agency said in a note.
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Risk scores range from 1 to 10, with 10 signalling the highest risk.
”We believe asset quality will continue to strengthen, benefiting from structural improvements in the operating environment and India’s good economic prospects,” S&P said.
The rating agency expects the ratio of weak loans in the industry to decline from 5.2% of gross loans as of March 31, 2023 to 3%-3.5% by March 31, 2025.
The rating agency also sees net credit costs, an indicator of provision costs attached to bad loans, to remain at about 1.2% over the next few years, with new bad loans seen at ”cyclical lows” over the next two financial years.
The rating agency upgraded four financial institutions and raised its assessment of the credit profiles of four banks.
Bajaj Finance, Hero Fincorp, Shriram Finance, and Union Bank of India were upgraded by one notch each.
The standalone credit profiles of HDFC Bank, ICICI Bank, and State Bank of India were also raised by one notch.
”We expect India’s financial institutions, especially the public-sector banks, to sustain their improvement in capital positions,” S&P said.
”Bank earnings will also likely be comparable to other emerging market peers, although margins could decline as the banks reprice deposits.”
The rating agency, however, said that performance of Indian banks would be polarised.
While SBI and top private sector banks have addressed asset-quality issues, other large public-sector banks are still saddled with a high volume of weak assets. This could result in higher credit losses and lower profitability, it said.
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