Polarisation in the performance of Indian banks will persist as many large public sector banks are still saddled with weak assets, high credit costs, and poor earnings, S&P Global Ratings said on Thursday.
It said State Bank of India and leading private sector banks have largely addressed their asset quality challenges, and their profitability is improving more sharply than the banking system.
In its Global Banking Outlook-2023 report, S&P said economic recovery is driving credit costs to cyclical low levels and stronger balance sheets and higher demand should boost bank loan growth, but deposit growth will lag.
"Polarisation in the performance of banks to persist," S&P said, adding the return on average assets would be 'adequate' at 1 per cent.
"Many large public sector banks are still saddled with weak assets, high credit costs, and poor earnings.
"Similarly, we expect a mixed-bag performance for finance companies (fincos).
"The asset quality of these fincos is often weaker than that of major private sector banks," it added.
S&P expects loan growth to stay somewhat in line with the trajectory of nominal GDP, and loan growth to the retail sector to continue to exceed that of the corporate sector, the agency added.
It said real GDP growth is likely to moderate as monetary conditions tighten and consumers grapple with higher inflation.
However, India's economic growth prospects should remain strong over the medium term, with GDP expanding 6.5-7 per cent annually in fiscal years 2024-2026.
"India's growth rates remain among the strongest outcomes that we expect, in our emerging markets universe," S&P added.
