Moody's gives banks reason to cheer, upgrades outlook to stable

Pace of additions to stressed loans to slowdown

Global rating agency Moody’s on Monday said it expected a gradual improvement in the working environment as it upgraded its outlook for India’s banking system from negative to stable.

The money committed by the government for public sector banks (PSBs) was inadequate to clean up their balance sheets, however, and more needed to be done to improve governance, the rating agency said.

Moody’s said the improving environment was expected to result in slower additions to problem loans. “Deteriorating asset quality had been a key driver of our previous negative outlook since November 2011,” it added.

While the stock of non-performing assets might continue to rise, the pace of new impaired loan formation in the current financial year would be lower than levels seen in the past four years, Moody’s said.

Indian banks’ gross non-performing assets and standard restructured loans rose to 10.2 per cent in June 2015 from 4.5 per cent in March 2011. The increase was especially large at state-owned banks, according to Moody’s.

The recovery in asset quality would be U- rather than V-shaped, because corporate balance sheets remained highly leveraged, the rating agency said.

Moody’s rates 15 banks in India that together account for around 70 per cent of the system’s assets. Four are private banks and 11 are state-owned.

Moody’s said the low capital level at state-owned banks was a key credit weakness. The government has announced plans to inject ~70,000 crore into PSBs over the next four years.

Srikanth Vadlamani, senior credit officer at Moody’s, said, “This amount is well short of the banks’ overall capital requirements and is not adequate to clean up balance sheets.

The low market valuation makes it difficult for PSU banks to access the equity market.”

The effects of reforming state-owned banks through capital infusion, autonomy and better corporate governance would be visible over three to five years, he added.

The Indian economy is expected to grow at 7.5 per cent over the next two years. An accommodative monetary policy should support the growth environment, Moody’s added.