Tighter risk framework strengthening India’s bank operating environment: Fitch

Indian banks are set to benefit from enhanced oversight by the Reserve Bank of India (RBI) and a more robust supervisory toolkit, which should reduce systemic risks and improve the operating environment, a report said.

These shifts, paired with strong economic growth prospects and reduced inflation risks, are credit positive for the sector, global rating agency Fitch said in a report.

“We believe regulatory responses to stress events, frameworks for monitoring risks and recovery of impaired loans have improved in recent years. Consequently, weaknesses that contributed to the last non-performing loan spike between the financial year ended March 2016 (FY16) and FY18 have been significantly reduced,” it said.

Banking system metrics are the strongest in years. However, some more recent reforms have not been tested in a down cycle, it said, adding that the sector non-performing loan ratio fell to 2.2 per cent in 1HFY26 (from a peak of 11.2 per cent in FY18). The common equity Tier 1 ratio has risen to 14.8 per cent, from estimates of 9.3 per cent in FY14.

The sector’s return on assets is also comparable with peer banking systems in the Asia-Pacific region, with a ‘bbb’ category operating environment, at around 1.3 per cent in recent years, it said.

“We believe the implementation of an ECL framework should contribute to reduced volatility by helping to smooth earnings over the cycle,” it said.

Over the medium term, the country’s robust econ3 omic growth - above 6 per cent over the next wo years - should continue to offer banks ample opportunities for profitable lending growth, it said.

“We estimate the banking sector credit/GDP ratio at 59 per cent in 2025, which remains below the peer average of 101 per cent, suggesting there is headroom for lending growth to exceed nominal GDP growth moderately over the medium term without posing major risks to systemic stability, if underwriting standards hold up,” it said.