Moody's maintains stable outlook for Indian banking sector amid expected asset quality deterioration

Ratings agency Moody’s has kept its outlook on Indian banking sector to be stable, while expecting some deterioration in asset quality, particularly in unsecured retail loans, microfinance loans and small business loans segment. Moody's also expects a system wide growth slowdown to 11% to 13% in FY 26 from a peak of 17% growth seen between March 2022 to March 2024

Growth is expected to moderate as banks would want to balance loan and deposit growth, the report said. The rating company expects non performing loans to 'increase moderately' and be in the range of 2% to 3% range in the next 12 to 18 months. NPAs for the banking industry touched a low of 2.6% as of September 2024.

Along with growth, banks profitability will also weaken, but will remain adequate as net interest margins (NIMs) will have moderate impact after a small rate cut, the report said. The Reserve Bank of India cut interest rates by 25 basis points to 6.25% in February.

Further rate cuts are also expected to be modest as the central bank takes a cautious stance amid global uncertainty around US trade policies.

“We expect slippage ratios and loan-loss provisioning costs to increase somewhat from cyclically very low levels. Along with this, we expect the system wide non performing loans ratio to be 2%-3% in next 12-18 months,” Amit Pandey, senior analyst at Moody’s said in the report. The quality of corporate loans is expected to be healthy.

Moody’s rates nine commercial banks in India - four public sector banks and five private sector banks. This accounts for about 70% of systemwide deposits as of the end of December 2024.