Moody's upgrades outlook on Indian banks to stable from negative

Cites improvement in operating environment, stable asset risk and capital scenario

Global rating agency Moody's has upgraded its outlook for the Indian banking system to stable from negative on gradual improvement in operating environment.

"The stable outlook over the next 12-18 months reflects expectation that the banks' gradually improving operating environment will result in a slower pace of additions to problem loans. It will lead to more stable impaired loan ratios," said Srikanth Vadlamani, vice president and senior credit officer, Moody's.

In a statement, the agency said that deteriorating asset quality was the key driver of Moody's negative outlook on Indian banks since November 2011.

"However, the recovery in asset quality will be U-shaped rather than V-shaped, because corporate balance sheets remain highly leveraged," it added.

Moody's in its report, "Banking System Outlook — India: Gradual Improvement inOperating Environment Drives Stable Outlook," said the stable outlook is based on its assessment of five drivers including improvement in operating environment and stable asset risk and capital scenario. 

The trend on funding and liquidity; profitability and efficiency  and government support is expected to be stable.