India’s Strong Economic Backdrop To Support Bank Asset Quality: Moody’s

Despite rising global uncertainty due to trade tensions and economic slowdowns in major economies, Moody's expects Indian banks to remain resilient, largely shielded by domestic factors

The agency highlighted a combination of government capital expenditure, tax cuts aimed at boosting middle-class consumption

Source : Freepik

Moody's Ratings on Tuesday projected a stable outlook for the Indian banking sector, buoyed by supportive domestic economic conditions that are expected to uphold asset quality. The credit rating agency said it anticipates the systemwide nonperforming loan (NPL) ratio to remain within the range of 2–3 per cent over the next 12 months, aligning closely with the 2.5 per cent level recorded at the end of December 2024.

Despite rising global uncertainty due to trade tensions and economic slowdowns in major economies, Moody's expects Indian banks to remain resilient, largely shielded by domestic factors.

Domestic Growth Drivers To Offset Global Headwinds

“While trade tensions have heightened economic uncertainty globally, India's domestic economic conditions will continue to be supportive for growth. That will underpin banks' asset quality, although the divergence of loan performance will remain across different product types and lenders,” Moody’s stated in its latest report.

The agency highlighted a combination of government capital expenditure, tax cuts aimed at boosting middle-class consumption, and potential monetary easing as key drivers keeping India’s economy on a solid growth path. The country’s limited reliance on goods trade also serves as a buffer against global volatility, the report noted.

Wholesale Loans Steady, Retail Segment Mixed

Moody's report emphasized that wholesale loans will continue to perform well, thanks to robust corporate profitability and low leverage levels. Wholesale credit remains a significant component of Indian banks’ portfolios alongside retail and agriculture loans.

However, the report raised concerns over unsecured retail loans, projecting that this category will remain more vulnerable compared to secured lending.
“New NPL formation rates for secured retail loans have broadly stayed low, while those for unsecured loans have risen in the past few quarters,” the report said. It further noted that smaller private sector banks are more exposed to this trend and may continue to exhibit weaker asset quality than their larger private and public sector counterparts.

Outlook Stable As Domestic Demand Stays Strong

The report concluded that while divergence in asset performance will persist across borrower segments and banks, the broader operating environment in India remains favorable. With macro indicators showing steady improvement and structural strengths in consumption and investment, the banking sector is expected to maintain its footing through the year.