Moody's maintains negative outlook on Indian banks

Asset quality to continue deteriorating, particularly for public sector banks

Rating agency Moody’s has maintained its negative outlook on India’s banking system, reflecting the effects of the rupee’s volatility, persistent inflation and slowing economic growth.

In a statement, Moody’s said asset quality would continue to deteriorate, particularly for public sector banks (PSBs), while profitability was likely to remain weak, limiting internal capital generation.

Moody’s rates 15 banks in India— 11 public sector banks and four private sector banks. It also incorporates government support in the ratings of all these banks.

 

Gene Fang, vice-president and senior analyst at Moody’s, said, “The operating environment for India’s banking system continues to exert negative pressure on the ratings of many PSBs. While structural issues related to the infrastructure sector are not new, the recent downturn in economic growth has exacerbated these problems and increased their negative effects on asset quality.”

 

India Banking System Outlook, a Moody’s report, spelt out expectations of how bank creditworthiness would evolve through the next 12-18 months. For private banks, asset quality had largely remained stable, Moody’s said. 

For public sector lenders, non-performing and restructured loans, as a percentage of gross loans, had increased. Reserves for loan losses remained weak and additional provisions would reduce profitability, it said.

 

However, systemic support for these banks remained stro-ng, as shown by the governme-nt’s recent announcement of allocations to boost capital in PSBs, the rating agency said. It said it expected government support for banks to continue, irrespective of the results of the 2014 Lok Sabha polls.

 

Indian banks continue to have sound liquidity metrics, underpinned by a sizable domestic deposit base and minimal reliance on wholesale funding.

 

“As India is currently coping with adjustments related to the economic cycle, how growth rebounds next year will have an impact on the credit profiles of Indian banks,” Fang said.

Indian banks continued to have sound liquidity metrics, underpinned by a sizable domestic deposit base and minimal reliance on wholesale funding, the rating agency said.