Moody's says India's growth potential fundamentally strong, maintains stable outlook on banks

Moody's Investors Service on Wednesday said the banking sector outlook remains stable and is supported by economic growth and improved financials.

"While we expect the country's real GDP growth to moderate in the fiscal year ending March 2024 (fiscal 2024), India's underlying growth potential is fundamentally strong, which will support banks' credit growth and asset quality," Moody's said.

However, loans to small and medium-size enterprises (SMEs) continue to pose risks to banks' asset quality because this segment is the most vulnerable to rises in interest rates.

Stating that asset quality of banks will be stable, it said non-performing loan (NPL) ratios will decline modestly because of recoveries and write-offs of legacy problem loans.

"Banks' profitability will stabilise after improving in the past few years as the boost from declines in loan-loss provisions wanes. Banks' capital, funding and liquidity will be stable and supportive of credit growth," Moody's said.

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The US-based rating agency also said the Indian economy will continue to grow strongly, despite external challenges, while maintaining a stable outlook for India's banking system.

Moody's expects India's real GDP to grow 5.5 per cent in fiscal 2024 and 6.5 per cent in fiscal 2025.

Although the projected growth rates are lower than 6.8 per cent in current fiscal, it is still a strong level, supported by domestic consumption, as well as government capital expenditure.

Moody's said credit demand from private corporates will also stay strong as inflation increases needs for working capital and as companies turn to domestic banks to meet their financing requirements at lower costs.

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