Outlook for Indian banking system remains negative, says Moody's

The outlook pertains mainly to the public-sector banks, which represent more than 70% of total banking-system assets

Global rating agency Moody’s on Wednesday said its outlook on India’s banking system remained negative. The high leverage in the corporate sector could prevent any meaningful recovery in asset quality over the next 12-18 months.

The negative outlook on the system pertains mainly to public sector banks. They represent a little more than 70 per cent of total banking system assets, said Gene Fang, a Moody’s vice-president and senior credit officer.

State-owned banks have experienced higher growth rates in non-performing and restructured loans and greater weakening in profits than private sector banks. These trends are unlikely to improve for public sector banks, added Fang.

The outlook for the banking system remained negative, as it has been since November 2011.

Going forward, India’s corporate sector will remain highly levered, representing an obstacle to a cyclical recovery in asset quality.

The outlook expresses Moody’s expectation of how bank credit worthiness will evolve in this system over the next 12-18 months. It looks at India’s banking system in terms of five factors — operating environment (classified as “stable”), asset quality and capital (“deteriorating”), funding and liquidity (“stable”), profitability and efficiency (“deteriorating”), and systemic support (“stable”).

While Moody’s expects economic growth to pick up moderately, this remain constrained by the high interest rates needed to contain inflation.

Moody’s base-case forecast is for gross domestic product growth of five per cent for the financial year ending March 2015 and 5.6 per cent for next financial year. The economy had grown by 4.7 per cent in 2013-14.

The report says India’s broad corporate sector is highly levered, with a debt to equity ratio of more than three.

In particular, companies engaged in infrastructure projects face both structural and cyclical challenges, the rating agency said.

Without stronger economic recovery, significant deleveraging will only occur beyond the horizon of this outlook, it added.