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Moody's Investors Service in its latest report has said that the credit quality of Indian banks and non-bank financial institutions will remain resilient despite a challenging environment for banks globally. It said strong domestic demand in India, improving credit conditions for bank borrowers, and strengthened solvency and funding of Indian financial institutions will support their credit quality. 

Moody's said credit conditions in India have gradually improved, with a significant reduction in the banks' legacy problem in loans over the past three years. Stress among non-bank financial institutions in India too has abated. It further noted that banks globally are facing liquidity pressures amid tighter monetary policy, outflows of excess liquidity built up during the coronavirus pandemic into more profitable investments and increased risk aversion among investors because of stress in the US banking sector. However, it said Indian banks have strong domestic funding franchises and ample liquidity to support growth in their loans in line with India's strong economic conditions.  

Capitalization at Moody’s rated banks has improved following capital raising from the equity market as well as capital infusions from the government in the case of public sector banks. Moody’s expects the average return on tangible assets for rated banks to hold steady at 1.0%-1.2% over the next two years, which will support asset growth of around 15% while keeping capital at current levels.