Indian banks will score from the country's relatively strong economic growth outlook and as local companies have greater room to step up borrowing, according to S&P Global Ratings.
Rising interest rates and inflationary pressures are unlikely to dampen borrowing in India as the South Asian nation emerges from the COVID-19 pandemic as one of the world's fastest-growing major economies.
"One of the main things in favor of the banking system is healthy economic growth prospects," Deepali Seth-Chhabria, Ratings' associate director of financial institutions ratings, said during an Aug. 25 webinar. "Lower credit costs and pickup in loan growth should sustain the turnaround in the banks' earnings and lead to capital formation as well, which has already improved in the last couple of years."
Ratings expects India's GDP to grow by 7.3% in the fiscal year ending March 31, 2023, compared to its projection of 7.8% growth six months ago. The downward pressure is driven by high oil prices, slowing global demand for India's exports and high inflation, while a forecast of a normal monsoon rain season, a rebound in contact-based services and improvement in consumer activity bode well for growth, Ratings said.
Most Indian banks reported better growth in lending and net interest income in the fiscal quarter ended June 30. However, many missed earnings expectations on mark-to-market losses, or unrealized losses on investments, caused by market volatility.
Healthy corporates
Ratings also expects banks to benefits from the improved health of corporate borrowers, citing the results of a stress test. It analyzed 816 companies, mostly unrated, with aggregate debt of about US$570 billion. In the study, inflation was stressed by 300 basis points and policy rate was stressed by 250 bps over the rating agency's own fiscal 2023 forecast of 5.65%.
Results of the test showed that borrowers with about 20% of debt may face a downward transition in notional credit risk tiers.
"We do not expect large-scale defaults in our stress scenario and there are a number of reasons for it," Seth-Chhabria said. India's continued strong economic growth will positively impact companies' revenues. Further, Indian borrowers are used to higher interest rates, so they have strong access to funding from domestic banks even in a high interest rate scenario.
Deleveraging by Indian corporates in recent years will also serve as a buffer against higher interest rates, Ratings analysts said.
"Leverage has come down materially over the last two years, and this deleveraging trend still broadly remains intact," said Neel Gopalakrishnan, Ratings' lead analyst and director for corporate ratings. "What we see is that the credit profiles of most rated entities [are] quite resilient."
Adani Group
In response to a question about recent media reports expressing worries about excessive leverage at companies controlled by one of India's richest tycoons, Gautam Adani, Ratings analysts said the Indian conglomerate's fundamentals are still solid, as it is still generating healthy cash flows, and that it could manage the leverage risk if it manages its growth ambitions.
"The growth ambitions for most of the group entities [are] fairly high. They have grown even through acquisitions across multiple entities," said Abhishek Dangra, Ratings' senior director of infrastructure ratings. The risk is in its acquisitions, which have recently been funded largely through debt, Dangra said.
The Adani Group, which includes Adani Enterprises Ltd. and Adani Ports and Special Economic Zone Ltd., was flagged as "deeply overleveraged" by CreditSights, a subsidiary of Fitch Ratings, in a recent note. Many of the group's companies need capital injections to reduce their high leverage levels, The Economic Times reported Aug. 23, citing CreditSights. The group's debt-funded growth plans could result in a massive debt trap that may impact the broader Indian markets and economy, according to the report.
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