In the dynamic landscape of global finance, Indian banks and Non-Banking Financial Companies (NBFCs) are demonstrating remarkable resilience - rooted in their strong credit profiles.
A credit profile is essentially a snapshot of a bank's financial health, indicating how likely it is to repay its debts. According to a report by Moody’s Investors Service, these profiles are being bolstered by robust domestic demand and improved borrowing conditions. The report also forecasts a positive trajectory for our banking sector. This optimism is driven by strong loan growth and a favourable credit environment. The gross non-performing asset ratio, which is the ratio of bad loans to total loans, is expected to fall from 4% to 2.6% by March 2024. This indicates a decrease in the proportion of loans that are likely to default, which is a positive sign for our banks. Let’s explore the key contributing factors -
Lower Costs and Steady Returns
The cost of credit, which is the cost incurred by banks to lend money, is expected to fall from 1% to 0.9% in the next financial year 2023-24. Concurrently, the return on assets - a measure of a bank's profitability relative to its total assets - is expected to remain steady. This suggests that banks are likely to become more efficient without affecting their profitability.
Improved Financial Health
Over the past three years, banks have significantly reduced their stock of old, problematic loans. Additionally, companies have been paying down their debts, leading to an overall improvement in their financial health. This progress is a testament to the robustness of India’s financial institutions.
Rising Deposit Costs: A Challenge
The journey is not without its challenges. The cost of deposits, which is the money banks pay to their customers who deposit money with them, is expected to rise in the next financial year 2023-24. This could put pressure on the net interest margins of banks, which is the difference between the interest income generated by banks and the amount of interest paid out to their lenders. Despite this challenge, robust loan growth is expected to maintain the core operating profits of banks.
The Impact of Deposit Costs
Looking ahead, there are some challenges on the horizon. One of these is the likely rise in deposit costs in the next financial year. This could put pressure on the net interest margins of banks. However, thanks to strong loan growth, banks are expected to keep their core operating profits steady, mitigating the impact of rising deposit costs.
Another development to watch is the expected transition to expected credit loss-based provisioning. This is a method of setting aside money to cover potential future losses on loans, and it could increase the capital requirements for some banks. However, this is a standard part of risk management in banking, and our financial institutions are well-prepared to handle this transition.
The Future of Loan Growth The future of loan growth in India looks promising. While the year-on-year loan growth of banks is expected to moderate due to higher interest rates, incremental credit growth is projected to be substantial. This is a positive sign for the continued growth and resilience of our banking sector.
In conclusion, the resilience of Indian banks and NBFCs is a testament to the strength of our financial sector. Despite the challenges posed by the global financial landscape, our banks and NBFCs are well-positioned to navigate these complexities and continue their trajectory of growth and resilience. This is good news not just for the financial sector, but for the Indian economy as a whole.