Defaults will continue to haunt govt-run banks: Moody's

Rating agency Moody’s has singled India from its otherwise positive outlook for the banking sector in the Asia-Pacific.

The rest of the region could get a respite from defaulting loans on the back of economic recovery but Indian public sector banks (PSBs) will continue to be hit by bad loans, it has said.

In its Asia-Pacific Banking Outlook 2013, it said impaired loans were yet to peak among PSBs in India.

While the government (India) was likely to remain supportive, relatively high inflation and modest fiscal capacity meant policy options were constrained when compared to China.

The modest cyclical rises in non-performing loans (NPLs) in many countries in the region will persist in the first half of the year, says Moody’s. This will be seen especially in trade-focused economies, most affected by the global economic slowing.

Rising asset quality pressures have been barely detectable in most countries in the region and NPLs are expected to peak in most banking systems by mid-year as economic recovery takes root. Any additional credit costs can, in the vast majority of cases, be easily absorbed by earnings. The two main possible exceptions are Vietnam and India, whose banking sectors get negative outlooks. Moody’s says the Vietnamese banking system is in much worse shape than India’s.

On interest rates in the Asia-Pacific, Moody’s said India and Vietnam were both exceptions to its general observation that interest rates in Asia were very low.

Both countries, when compared with the rest of the region, were seeing higher inflation and weaker exchange rates.

While interest rates are likely to fall in India and Vietnam in 2013, they will also remain higher than in the rest of Asia. A higher interest rate regime meant weaker resilience for their banking systems in a global economic slowdown after a relatively rapid credit growth, it added.