India's weakened banking sector awaits stronger credit growth as it tucks bad loans away

From 4.7% in end-2016, loans booked double-digit growth of 14.9% in November.

Indian banks are gradually recovering from their crippling bad loan legacies as the improvement of headline credit figures are poised to extend over the coming quarters and seal the recuperation of the ailing banking sector.

Credit growth to the commercial sector has already picked up to double-digit growth at 14.9% in November from the low of 4.7% in December 2016.

“[W]e expect the gradual cleaning up of non-performing loans in the banking sector to be supportive of new loan issuances over the coming quarters, and this should support the continued expansion of financial services,” the firm said in a report.

Also read: The worst is almost over for worn out Indian banks

India holds the dubious distinction as having the world’s second worst bad debt burden at 11.6%, according to Bloomberg data. However, the favourable commodity cycle boosting the steel and cement sector, stricter bad loan recognition rules from the Reserve Bank of India (RBI) and a bankruptcy law has lent support to the recovery of India’s ailing banking system.

In fact, public sector banks, which bore the brunt of the sector’s bad loan problem, were able to recover $5.23b (INR365b) of nonperforming assets in Q1 largely due to a an improvement in insolvency cases from the steel sector. Punjab National Bank along with Indian Bank recovered NPAs worth $1.21b (INR 84.45b) and $100.11m (INR 6.98b) respectively in Q1 as their fellow state lenders, State Bank of India, Bank of Baroda and Bank of India witnessed similar improvements.

The economy's solid growth prospects is also expected to speed up the sector’s bounce back into the black with Fitch Solutions expecting real GDP to hit 7.1% for FY2018/19. Such pace of growth puts India as the fastest growing major economy in the region and even ahead of China whose economy is tipped to expand by 6.7% in 2018.

“We believe that India will still clock in relatively rapid economic expansion in the region, despite our downward revision to our growth forecasts,” concluded Fitch Solutions.