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Global rating agency Fitch has said a sustained improvement in the financial performance of Indian banks bodes well for the sector's intrinsic risk profiles. The pace of asset quality and profitability improvement has exceeded expectations, while capital buffers are broadly in line with the projections. It stated the sector's impaired-loan ratio declined to 4.5 per cent in the first nine months of financial year ended March 2023 (9MFY23), from 6 per cent at FY'22, adding, this was nearly 60 basis points below Fitch's FY23 estimate. It said increased write-offs have been a key factor, but higher loan growth, supported by lower slippages and improved recoveries, have also played a role.

Fitch expects a further improvement by FY23, although banks still face the risk of asset-quality pressure associated with the unwinding of loan forbearance in FY24. It said ‘The sector's improving provision cover (9MFY23: 75 per cent, FY22: 71 per cent) also supports banks' ability to withstand risks, although private banks are significantly better placed than state banks due to their lower impaired loan ratio of 2.1 per cent, against state banks' 5.6 per cent.’

Besides, it said Sound economic momentum has contributed to a further drop in credit costs to 0.95 per cent in 9MFY23, as per the estimate, compared with 1.26 per cent in FY22. Lower credit costs were the primary factor driving an improvement in return on assets to 1.1 per cent in 9MFY23, outpacing Fitch's FY23 estimate of 0.9 per cent, although earnings also benefited from higher-than-expected loan growth and improving net interest margins