S&P Global Ratings on Thursday said Indian banking sector profitability will stabilise at a healthy level, and asset quality will continue to improve.

“Indian banks’ earnings will likely remain healthy. The sector has improved substantially in the past seven years, from a period when many public-sector lenders were grappling with bad loans,” S&P Global Ratings credit analyst Deepali Seth Chhabria said.

A strong recovery is underway in the Indian banking sector, and lenders have just reported their best results in a decade, S&P Global Ratings said. It expects the sector profitability to stabilise at a healthy level, and that banks’ asset quality will continue to improve.

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Indian banking profitability is benefiting from higher net interest margins and lower credit costs.

We estimate a system-wide return on average assets (ROAA) at 1.2 per cent for fiscal 2023 (year ending March 31, 2023). System-wide ROAA will likely hover around 1.1 per cent in fiscal 2024.

“The formation of new non-performing loans will remain at cyclical low levels, despite pressure from higher interest rates,” S&P Global Ratings credit analyst Geeta Chugh said.

“A recovery in written-off accounts is also boosting the profitability of banks,” she added India’s strong economic performance is bolstering the banking sector.

S&P Global Ratings still forecasts the country will grow 6-7 per cent annually until 2026 at least, making India the fastest-growing economy in Asia-Pacific, and the fastest-growing large economy globally.