Indian banking sector: Weak loans of banks to fall to 3-3.5% of gross advances by March 2025: S&P

S&P Global Ratings on Thursday projected Indian banking sector’s weak loans will decline to 3-3.5 per cent of gross advances by March 31, 2025 as structural improvements and good economic prospects would support the resilience of financial institutions. In its mid-year global bank outlook, S&P said India’s economic growth prospects should remain strong over the medium term, with GDP expanding 6-7.1 per cent annually in fiscal years 2024-2026.

India to remain the fastest-growing economy in Asia-Pacific, and the fastest-growing large economy globally, it said.

“We project the banking sector’s weak loans will decline to 3-3.5 per cent of gross loans by March 31, 2025 on the back of structural improvement, including healthy corporate balance sheets, tighter underwriting standards, and improved risk-management practices,” S&P Primary Credit Analyst Deepali Seth Chhabria said.

S&P also said that stronger balance sheets and higher demand should boost bank loan growth, but deposit growth would lag.

“The small and midsize enterprise sector and low-income households are vulnerable to rising interest rates and high inflation. But we believe that interest rates in India are unlikely to rise materially. This should limit the risk for the country’s banking industry,” Chhabria said.

S&P further said that slower global growth and external demand will weigh on economic activity and could fuel further inflation. “However, given that India is domestically oriented, we expect the economic growth to be less affected. We assume the impact on the banking sector will also be modest.”