Indian banks' operating environment, capital buffers stronger -Fitch

MUMBAI, Aug 16 (Reuters) - Indian banks operating environment has strengthened as economic risks associated with the COVID-19 pandemic have ebbed and as lenders have built appropriate buffers against potential stress, Fitch Ratings said on Wednesday.

\“A number of prudential indicators for the sector have also improved compared with pre-pandemic levels, though growing risk appetite in a relatively benign OE (operating environment) highlights the importance of appropriate buffers against potential stress,\” the rating agency said in a note.

With Indian banks shoring up their capital buffers and cleaning up their balance sheets following the pandemic, their gross non-performing asset ratio has fallen to a 10-year low of 3.9% as of March 2023.

The strengthening of capital buffers, Fitch noted, has boosted the sectors average common equity Tier 1 capital ratio to 13.4% at the end of fiscal 2023, from 10.4% at the end of fiscal 2018.

Earnings buffers at banks also appear \“significant,\” the rating agency said.

Indias large economy and favourable demographics should offer banks opportunities to generate profitable business and diversify risk and revenue, Fitch said.

However, rapid loan growth and higher exposure to certain asset classes are also likely to indicate greater risk appetite amid stiff competition, which could raise risks if not managed carefully, it warned.

Fitch expects some normalisation in credit growth for 2023-24, although loan demand has remained robust in April-June.

It forecasts Indias real gross domestic product growth to average 6.4% annually in the three years to March 2026.