Fitch Ratings’ projections claim that the financial performance of Indian banks reveals that their strong run could last longer than earlier forecasted.

What Happened? Credit rating giant Fitch believes that there could likely be more upside in bank performance, with Covid-related risks largely overcome and a steady improvement in bank balance sheets over the past three years.

Fitch in a research note on Tuesday said the sector’s impaired-loan ratio declined to 4.5% in the first nine months of the financial year ending March 2023 (9MFY23), from 6% in FY22.

To break things down, a loan is considered to be impaired when it is probable that not all of the related principal and interest payments will be collected.

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Increased write-offs have been a key factor in bringing down the impaired-loan ratio, but higher loan growth, supported by lower slippages and improved recoveries, has also played a role.

Per Fitch data, private banks are faring better than state-owned banks due to their lower impaired loan ratio of 2.1%, against state banks' 5.6%.

Why Does it Matter? Fitch expects a further improvement by FY23, although banks still face the risk of asset-quality pressure associated with the unwinding of loan forbearance in FY24.

The rating agency said the sustained softening of financial-sector risks by banks could support a higher operating environment score, although that will depend on a host of various factors and not near-term performance alone.

These factors of assessment include medium-term growth potential, borrower health and loans under regulatory relief.

There is also a risk that continued strong loan growth may lead to selective or incremental increases in risk appetite. “Net interest margin compression and higher credit costs post wind-down of regulatory forbearance could still weigh on financial profiles,” adds Fitch.

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