Moody's says Indian banks moving past worst of bad loans

MUMBAI (Reuters) - India's banking sector is moving past the worst of its asset quality down cycle, Moody's Investors Service said on Monday, although it warned that state-run banks' capital levels remain a key weakness.

Gross bad loans as a percentage of total loans of Indian banks have nearly doubled to 8.7 percent as of June, from 4.6 percent in March last year, according to data from the nation's central bank. Including rolled-over or restructured loans, 12 percent of all bank loans were stressed as of end-June.

Banks' additions to bad loans surged this year after an asset quality review ordered by regulator the Reserve Bank of India, which wants the commercial lenders to clean up their balance sheets by March 2017.

Moody's said it had a "stable" outlook for the banking sector over the next 12 to 18 months.

"While the stock of impaired loans may still increase during the horizon of this outlook, the pace of new impaired loan formation should be lower than what it has been over the last few years," the rating agency said in a report.

For the 11 Indian state-run banks the agency rates, it estimates a capital requirement of 1.2 trillion rupees ($18 billion) by March 2019 to meet the global Basel III banking rules, Alka Anbarasu, a senior analyst, said at a press conference, reiterating earlier forecasts.

The Indian government has estimated a total capital requirement of 1.8 trillion rupees for all 22 state-run banks. It has pledged to inject over four years to March 2019 a total of 700 billion rupees, which many including Moody's believe will not be enough.

"A potential way to bridge this capital shortfall would be to slow loan growth to the low single digits over the next three years," Moody's said in the report.

($1 = 66.9600 rupees)

(Reporting by Devidutta Tripathy; Editing by Biju Dwarakanath)