Indian Banks See Strong Performance, Impaired Loan Ratio Nears Record Low: Fitch

Fitch Ratings on Monday said Indian banks have maintained strong performance in the first nine months of the current financial year, with the sector’s impaired loan ratio nearing its lowest levels.

The global rating agency noted that improvements in key financial metrics over the past few years have bolstered banks’ viability ratings. Since 2018, banks have taken a more measured approach to risk, diversifying loans and improving corporate exposures, which has contributed to a decline in bad loan formation, Fitch said.

A reduction in legacy bad loans has further strengthened banks’ gross impaired loan ratios and earnings. However, Fitch cautioned that these risk improvements remain untested, with banks adjusting their risk appetite over different cycles—such as the recent expansion in unsecured personal loans, which was curbed by regulatory measures.

"Indian banks performed robustly in the first nine months of the financial year ending March 2025, with most key financial metrics improving beyond Fitch's expectations. The sector’s return on assets rose by about 10 basis points to 1.4% in 9MFY25 from FY24," the agency said.

Fitch added that while the impaired loan ratio is near its lowest point, further improvement is possible in FY26. The ratio declined by around 40 basis points from FY24 to 2.4% in December 2024, with Punjab National Bank seeing the most significant reduction, primarily due to write-offs of legacy bad loans.

(With text inputs from PTI.)