Banks' bad loan problem to stay, says Moody's

Prospects for improving creditor's right look bleak

Global rating agency Moody’s shows global fund managers expect moderation in fresh asset slippages at Indian banks.

However, woes from problem loans are not likely to go soon. Hong Kong respondents were slightly more optimistic than Singapore peers but almost none anticipate a sharp improvement, according to the study Moody’s issued on Monday.

Indian banks’ problem loan ratios are unlikely to fall in 2015-16. However, the formation of new non-performing loans will probably decelerate.

The majority of respondents expect no significant increases in the capital levels of Indian state-owned banks over the next two years. They are also not optimistic about progress to improve creditor rights of banks over the next three years.

Indian state-owned banks have little capacity to improve their generally weak capital buffers through retained earnings. External capital infusion, including from the government, is likely to remain scarce.

Hong Kong and Singapore respondents differed on whether there would be meaningful corporate governance reforms in state-owned banks over the next three years.

Hong Kong’s tended to be moderately negative and Singapore’s to be moderately positive, Moody’s said.

Asset bubbles remain the top credit risk. The investor poll on Asian banks showed unwinding of asset bubbles to be the top macroeconomic threat in the coming 12 months, followed by slowing growth in China.

Eugene Tarzimanov, a vice-president, said: “We largely agree that asset bubbles, particularly in real estate, are an important but manageable source of credit risk for banks in 2015 and 2016.”

Property prices have appreciated particularly rapidly in Hong Kong (Aa1 stable), India (Baa3 positive), Malaysia (A3 positive) and Singapore (Aaa stable) since the 2008-09 global financial crisis, it added.