Indian banks look set to reward shareholders with the highest dividend in at least seven years.

The country's banks are forecast to take their share in aggregate payout across all sectors to 13% for the year ending March 31, 2024, according to S&P Global Market Intelligence. This is up from 12% for the fiscal year ended March 31, 2023, and 9% in the year ended March 31, 2022.

This is a sharp rebound from just 1% in 2020, when the Reserve Bank of India asked lenders to conserve cash and suspend dividend payments due to COVID-19. HDFC Bank Ltd., which declared a special dividend to commemorate 25 years of its operation, was the only major lender to make a payout for 2020. Indian banks' share in aggregate dividends stood at 7.6% in the fiscal year ended March 2017 and 5% each in the following two pre-pandemic years, according to Market Intelligence data.

Ready to capitalize

"Banks remain well-positioned to capitalize on opportunities in the Indian economy and banking industry," said Tusharika Aggarwal, a dividend forecasting research analyst at S&P Global Market Intelligence. India's brisk economic activity will likely "sustain high credit growth, resulting in excellent earnings forecasts for Indian banks," Aggarwal said.

Several Indian banks recently reported record net profits, thanks to rising interest rates and strong credit growth as the country's economy recovered from the pandemic. Banks, especially state-owned, have also reduced their bad debts and improved financial metrics such as capital-to-risk-weighted assets and common equity Tier 1 ratios. The systemwide gross nonperforming asset ratio fell to 3.9% in March, the lowest in 10 years, according to the Reserve Bank of India (RBI).

Bank profits have stayed resilient globally despite heightened macroeconomic uncertainty and bank failures earlier this year, as they thrived under a high-interest-rate environment. As a result, banks' dividend payments across the globe will increase 8.5% in calendar year 2023 and 6% in 2024, according to estimates Market Intelligence provided in an Aug. 7 report.

The major Indian banks are set to see dividend payouts above this average, as they benefited from high public infrastructure spending and a growing economy. The RBI expects India's economy to grow 6.5% in the fiscal year that started April 1, after a 7.0% expansion in the last fiscal year.

The outlook for Indian banks' share in aggregate dividends is likely to remain stable in the next few years, aided by robust economic activity in the country, high credit growth and the government's planned infrastructure investments, Aggarwal said.

"If the asset quality remains robust as it is in the current environment, then banks will require to make less provisioning against bad loans," Aggarwal said. "Increase in credit growth means banks will give out more loans expanding the net interest income."

In addition to asset quality and credit growth, a reduction in interest rates by the RBI will help banks achieve higher margins, as they will lower the interest rates on deposits with immediate effect, with a lag on rates levied on loans, the analyst added.

Axis Bank Ltd., Bandhan Bank Ltd. and AU Small Finance Bank Ltd. will lead dividend payout increases in the next few years, Aggarwal said.

Axis Bank's dividend payout is estimated to surge 49% for fiscal year 2024, the data shows. ICICI Bank Ltd. and HDFC Bank are also set to boost their fiscal 2024 dividends by 19% and 12%, respectively, followed by a 10% increase at State Bank of India.