Virendra Pandit
New Delhi: Indian economy has returned on track after the Covid-19 pandemic and the Russia-Ukraine war is unlikely to derail its recovery, global rating agency Moody’s said on Wednesday.
The economic rebound has created favorable operating conditions for Indian banks, and their loan performance and profitability are improving, although from a low base. Also, their capital and liquidity levels are stable, it said.
Moody’s, however, cautioned that the global economic fallout from the Russia-Ukraine military conflict will push up inflation and interest rates in India, and create supply constraints.
Despite these bottlenecks, Indian banks are in better shape now than before the pandemic. Loan quality had deteriorated over the previous decade as a large proportion of the banks’ corporate lending books turned sour.
In the previous decade, corporate stress was linked to multiple factors, including slowing economic growth, over-indebtedness, and poor governance. Since then, these lenders cleaned their balance sheets and Non-Performing Assets (NPAs) fell, Moody’s said.
The asset-weighted average of banks’ gross non-performing loans (NPLs) ratios nearly halved to 5.7 percent as of December 31, 2021, from a peak of 10.3 percent at the end of March 2018. “We expect NPLs to decline further as banks make recoveries or write off legacy problem debt, while the formation of new NPLs will be stable as the economy recovers”, it added.
The rating agency said the loan growth will also help push NPL ratios down by expanding the overall pool of loans, even though new defaults may arise from loans that have been restructured because of pandemic-related economic disruption.
This year, consumer and business confidence has improved and domestic demand has gone up. Declines in loan-loss provisions as NPLs fall and increases in net interest margins as interest rates rise will boost banks’ profitability. The capital, funding, and liquidity will be stable and support loan growth, it added.
