Banking Industry Country Risk Assessment: India

Increased credit costs and a possible dip in margins could lower banks' return on assets slightly to about 1.2% in fiscal 2025. In our view, directed lending by the government and the presence of many government-owned banks distort competition. Government-owned banks dominate the country's banking sector, accounting for about 60% of customer deposits. Weak governance and transparency undermine the institutional framework for the banking sector. The Reserve Bank of India (RBI) has imposed heavy penalties on banks for their governance failures in recent years, which could spur some institutional improvement. The Indian banking system's funding profile remains a strength, despite some recent weakening in its credit-to-deposit ratio. Banks operating in India remain exposed to high economic risks in a low-income

...We expect good growth prospects for the Indian economy over the next few years. The imbalances in the economy should also remain restrained over the next two years. Nevertheless, banks in India remain exposed to high economic risks due to low income levels, despite relatively moderate private sector debt. Asset quality should remain healthy, reflecting structural improvements in the operating conditions and good economic prospects. We expect credit losses will rise again from low levels. Unsecured personal loans have grown rapidly and could raise nonperforming loans (NPLs). Nevertheless, we believe underwriting standards for retail loans in India are conservative, and delinquencies in this segment will remain manageable. Increased credit costs and a possible dip in margins could lower banks' return on assets slightly to about 1.2% in fiscal 2025....

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