Indian Banks' Creditworthiness Hinges On Risk Appetite, Says Fitch Ratings

Indian banks' risk appetite through high loan growth will remain a key point of consideration for determining their creditworthiness, according to Fitch Ratings. This would be important, despite their improved financial performance.

Past volatility has weighed heavily on banks' performance and also impeded their ability to defend their market share, the agency said in a report. Hence, sustainable risk-adjusted returns are also important.

"Large private banks gained significant market share in the last credit cycle and continue to grow rapidly; state banks also returned to brisk growth but lagged large private banks," Fitch Ratings said.

Elaborating on the current environment of banks' operations, Fitch Ratings said that asset quality pressures from the previous credit cycle are now subsiding. For instance, bank loans grew by 16% in the financial year 2023-24, exceeding the compounded annual growth rate of 8% over the financial years spanning April 2015 to March 2022.

Here, retail loans constituted around 10% of the system loans and grew at around 20% CAGR on the back of a shift towards unsecured credit.

In addition, with banks' interest in SME and farm loans rising, it is notwithstanding above-average impaired loan ratios of 5% and 7%, respectively, in the first half of previous fiscal.

"Banks often rely on government guarantees to mitigate risk in SME loans, but there is room for better visibility on risks covered by these guarantees," the agency said.

Hence, the ratings agency's assessment of Indian banks' risk profiles also factored in lower transparency in terms of data disclosures on retail underwriting, credit bureau scores and recovery rates.

The next cycle will test the effectiveness of the Reserve Bank of India's recent measures, which have reinforced safeguards and improved governance and risk management.