Fitch Ratings reported on Monday that Indian banks have shown strong performance in the first nine months of the current financial year, with the sector’s impaired loan ratio nearing its lowest point.
In a detailed commentary, Fitch highlighted that the improvements in key performance indicators over recent years would significantly support the Viability Ratings (VRs) of Indian banks.
The global rating agency also noted that since 2018, Indian banks have become more cautious in their risk-taking. Efforts to diversify loan portfolios and improve the quality of corporate exposures have played a crucial role in reducing the formation of bad loans.
Fitch stated that the reduction in legacy bad loans has led to better performance in the banks’ gross impaired loan ratios and overall earnings.
However, the rating agency cautioned that these risk management improvements have not yet been fully tested. Historically, banks have adjusted their risk appetite through different cycles. For example, there was an increase in unsecured personal loans in recent years, but regulatory measures later discouraged this trend.
“Indian banks performed robustly in the first nine months of the financial year ending March 2025 (9MFY25), with most key financial metrics exceeding Fitch’s expectations. The sector’s Return on Assets (ROA) increased by about 10 basis points, reaching 1.4% in 9MFY25, compared to 1.3% in FY24,” Fitch noted.
Fitch also mentioned that while the sector’s impaired loan ratio is close to its lowest level, there is still room for further improvement in FY26.
The ratio fell by approximately 40 basis points from FY24 to 2.4% in December 2024, with Punjab National Bank (PNB) seeing the largest decline, primarily due to the write-offs of legacy bad loans.
