On Tuesday, because of the “strong recovery” in India’s financial sector, S&P Global Ratings raised its evaluation of India’s banking industry. The Government’s high debt-to-GDP ratio and poor financial sector have been identified as the factors dragging down India’s sovereign ratings, keeping the country’s rating one notch above “Junk” grade.
According to the rating agency, the indicator of the economy’s financial sector, ‘Banking Industry Country Risk Assessment’ of India, has been raised one notch to 5 from 6 earlier. The score for the risk varies from 1 to 10, with 10 indicating the highest risk.
According to the rating agency, they expect that there can be a decline in the weak loan ratio in the industry from 5.2% of gross loans as of March 31, 2023, to 3% to 3.5% by March 31, 2025.
As an indicator of the provision costs attached to bad loans, the ratings agency stated that they see the net credit costs staying at 1.2% over the next few years. Over the following two financial years, new bad loans are expected to reach “cyclical lows.”
The rating agency boosted its evaluation of the credit profiles of four banks and upgraded four financial organizations. The banks upgraded by one notch were Bajaj Finance, Union Bank of India, Hero Fincorp, and Shriram Finance.
Also improved by one notch were the standalone credit profiles of HDFC Bank, ICICI Bank, and State Bank of India. S&P said that “We expect India’s financial institutions, especially the public-sector banks, to sustain their improvement in capital positions.” “Bank earnings will also likely be comparable to other emerging market peers, although margins could decline as the banks reprice deposits.”
However, the rating agency said that the performance of Indian banks would be polarized. Many large public sector banks are burdened with a sizable volume of weak assets, while SBI and top private sector banks have addressed issues with asset quality. It warned that this might lead to greater credit losses and less profitability.
