India's 2016-2017 budget is moderately credit positive for most sectors, but credit negative for public sector banks

Moody's Investors Service

Moody's Investors Service says that India's 2016-2017 budget is moderately credit positive for most sectors, but credit negative for public sector banks because of the insufficient allocation of capital for the segment.

"The budget is credit negative for public sector banks because the government has stuck to its capital infusion roadmap announced in 2015, budgeting INR250 billion in injections," says Srikanth Vadlamani, a Moody's Vice President and Senior Credit Officer.

"By contrast, we believe that unless the banks receive INR1.45 trillion for the four fiscal years ending 31 March 2016 to 31 March 2019, their credit profiles will worsen," adds Vadlamani.

Moody's points out that public sector banks are unlikely to gain access to the capital markets for equity capital in the near term, given their low valuations. The banks will therefore have to turn to the government for capital injections at least over the next 18 months.

As for the Indian sovereign (Baa3 positive), the budget indicates a continued commitment to gradual fiscal consolidation by bringing down fiscal deficits to 3% over the next two years. However, the proposals do not contain significant measures to address structural fiscal challenges.

On the issue of securitization, Moody's says that the development of securitization markets in India and China will help the two countries achieve their common goal of building inclusive financial systems that will ultimately bring affordable credit to the underprivileged segments of their societies.

Moody's explains that in both countries, non-bank finance companies (NBFCs) are key providers of credit to individuals and small businesses that would otherwise have limited access to bank loans or would incur high interest costs for such loans. While there are various funding avenues open to NBFCs in India and China, securitization has proven to be reliable and competitively priced, and is therefore an important source of the funds the NBFCs use for lending.

Other research and rating highlights in this edition of Inside India include:

Downgrade of Indian Steel Companies Reflects Persistently Weak Global Steel Prices

Heard from the Market: India Not Immune to External Risks

Banking Sector: Accelerated NPL Recognition Requires Front Ending of External Capital Injections

ONGC and Oil India Face Higher Risk of Downgrade Than Companies Rated at Par with Their Sovereigns

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