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Improving credit growth, decreasing asset-quality risks will be the character of Indian non-banking financial institutions (NBFI) during FY23, said Fitch Ratings on Monday.

According to the credit rating agency, this status should support NBFI's performance amid a broadening economic recovery, although certain segments could still be vulnerable to higher-than-expected inflation.

Fitch revised the Outlook on India's 'BBB-' sovereign rating to Stable from Negative in June 2022.

This was underscored by a rapid economic recovery and easing financial-sector weaknesses, which reduce the downside risks to the country's medium-term growth despite near-term inflationary headwinds, the rating agency said.

The gross domestic product (GDP) rebounded by 8.7 per cent in FY22 after contracting by 6.6 per cent in FY21.

Fitch said it projects solid medium-term growth potential of around 7 per cent between FY24 and FY27 (FY23: 7.8 per cent).

"We do not expect a significant rise in non-performing loans (NPLs), as an economic recovery should underpin borrowers' ability to repay. Runaway inflation prompting significantly steeper hikes in policy rates would be a downside risk, with a potential impact on more economically sensitive sectors such as SMEs (small and medium enterprises) and property developers," Fitch said.

Large NBFIs' funding and liquidity profiles are likely to remain stable even as funding costs rise in line with rising policy rates both domestically and globally.

"The effect on NBFI net interest margins will differ depending on their loan segment and pricing power. Nonetheless, we expect sector profitability to remain broadly stable overall, in light of stronger anticipated loan volumes and ameliorating credit costs," Fitch added.