Moody’s Projects Stable Outlook For Indian Banking Sector As Economic Conditions Support Growth

Moody’s Ratings projected a steady outlook for India’s banking sector on Tuesday, stating that domestic economic conditions will remain conducive to growth and help banks maintain stable asset quality over the next year.

According to Moody’s latest sectoral report, India’s economy is expected to remain resilient despite global uncertainties such as ongoing trade tensions.

The agency noted that internal growth drivers will support the banking system, keeping the systemwide non-performing loan (NPL) ratio between 2–3% over the coming 12 months. As of December 2024, this ratio stood at 2.5%.

“India’s domestic economic conditions will continue to support growth,” the report stated. “This will underpin banks’ asset quality, although loan performance will vary across products and lenders.”

Government Spending And Consumption-Led Recovery

Moody’s cited several factors reinforcing domestic economic stability, including sustained government capital expenditure, tax reductions aimed at boosting middle-class consumption, and continued monetary easing by the Reserve Bank of India.

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These measures, the agency said, will collectively help strengthen the economy and, by extension, the banking sector.

India’s relatively low dependency on goods trade, compared to other emerging markets, is also expected to shield it partially from global economic disruptions.

Wholesale Loan Quality Remains Strong

The report observed that wholesale loans, comprising a significant portion of Indian banks’ portfolios alongside retail and agriculture loans, will maintain high asset quality.

Corporate borrowers, Moody’s said, continue to exhibit solid profitability and low levels of leverage, which supports this outlook.

Unsecured Retail Loans Continue To Pose Risk

However, Moody’s highlighted that not all loan segments will perform equally well. The agency expects the quality of unsecured retail loans to remain weaker than secured loans for at least the next few quarters.

“New NPL formation rates for secured retail loans have remained low, whereas those for unsecured loans have increased over recent quarters,” Moody’s noted. “This trend will likely persist, leaving small private banks more exposed to asset quality risks compared to large private and public sector banks.”

Outlook

In summary, while external uncertainties persist, Moody’s believes India’s internal economic momentum will allow its banks to preserve asset quality and maintain low NPL levels in the near term.

The divergence in loan performance across sectors and lenders, however, remains a key factor to watch.