Domestic economic conditions to support growth, help preserve banks' asset quality: Moody's

Moody's Ratings on Tuesday said India's domestic economic conditions will continue to be supportive for growth, which will help banks preserve their asset quality and maintain systemwide nonperforming loan (NPL) ratio 2-3 per cent in over next 12 months.

In its report on the banking sector, Moody's said asset quality will hold up despite global economic uncertainty.

''While trade tensions have heightened economic uncertainty globally, India's domestic economic conditions will continue to be supportive for growth. That will underpin banks' asset quality, although the divergence of loan performance will remain across different product types and lenders,'' it said.

It said domestic economic conditions will remain supportive for banks. The government capital expenditure, tax cuts for middle-class income groups to boost consumption and monetary easing will underpin the Indian economy. Also, a low-level of dependency on goods trade will shield it from external risks to an extent.

''This will help banks preserve their asset quality. We expect the systemwide nonperforming loan (NPL) ratio to remain at 2-3 per cent in the next 12 months, compared to 2.5 per cent at the end of December 2024,'' Moody's said.

It said the quality of wholesale loans will remain healthy, as companies maintain good profitability and low levels of leverage. Wholesale loans are a key part of Indian banks' loan books, along with retail and agriculture loans.

However, Moody's projected the quality of unsecured retail loans will remain weaker than that of secured ones at least for the next few quarters.

''New NPL formation rates for secured retail loans have broadly stayed low, while those for unsecured loans have risen in the past few quarters. As this trend persists, small private sector banks will continue to have weaker asset quality, than large private banks and public sector banks,'' it added.

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