Global financial services firm Moody’s Analytics said India’s economy was on track post-pandemic and it does not expect the military conflict (in Ukraine) to derail the recovery.
Several months into the conflict, fears about the impact have subsided.
“After a robust rebound of more than 9% in the year ending March 2022 (fiscal year 2021), we expect real GDP growth of 8.2% in fiscal year 2022, the expansion the faster among G20 countries globally and partly reflecting the ongoing baseline effects of the pandemic-has led to disruption,” he said in a report.
The buoyant economy is creating favorable operating conditions for the country’s banks, and their lending performance and profitability are improving, albeit from a low base. Capital and liquidity levels are also stable.
The global economic fallout from the Russian-Ukrainian military conflict will drive up inflation and interest rates in India and create supply constraints, he said.
India, as an agricultural economy, is a net food exporter but depends on large agricultural imports such as palm oil.
“Rising food prices will therefore directly affect inflation, while soaring fuel prices will have an even greater negative impact. India’s consumer price index (CPI) was 6.1% before the conflict and rose to 7% in March.
Indian banks, however, are in better shape now than before the pandemic. Loan quality had deteriorated over the previous decade as a large portion of banks’ corporate loan portfolios deteriorated. Business stress at this time was linked to multiple factors, including slowing economic growth, over-indebtedness and poor governance.
Since then, banks have cleaned up their balance sheets and non-performing loans (NPLs) are declining accordingly.
“The asset-weighted average gross NPL ratios of rated banks fell by nearly half to 5.7% as of December 31, 2021, from a peak of 10.3% at end-March 2018.”
The report says it expects NPLs to decline further as banks make collections or write off problematic debts inherited from the past, while the formation of new NPLs will be steady as the economy recovers. will straighten.
“Loan growth will also help lower NPL ratios by expanding the overall pool of loans, although further defaults may arise from loans that have been restructured due to pandemic-related economic disruptions.”
This year, consumer and business confidence is improving and domestic demand is on the rise.
Lower loan loss provisions as NPLs fall and higher net interest margins as interest rates rise will boost bank profitability, while capital, funding and liquidity will be stable and support overall loan growth, according to the report.