Moody’s Maintains Negative Outlook for India’s Banking System

The outlook for India’s banking system for the next 12-18 months remains negative – as it has been since November 2011 – reflecting the continued challenging nature of its domestic operating environment, says Moody’s Investors Service.

“This environment is characterised by slow economic growth, high inflation, high interest rates, and a weak local currency, and we expect these factors to lead to a further deterioration in asset quality, an increase in provisioning costs, and a fall in profitability,” said Vineet Gupta, a Moody’s vice president and senior analyst.

“And when we also consider the high level of loan growth which, at about 15% annually, is expected to continue outstripping internal capital generation, then most of the Moody’s-rated Indian banks will be challenged to maintain capitalisation levels at current levels, and some will even need to raise new capital externally.”

Furthermore, Moody’s views the loan classification – more particularly with regards to restructured loans – and provisioning practices in India as weak. “Loan classification and provisioning requirements mask the extent of the banks’ asset quality and capital challenges,” added Gupta.

“On the positive side, one anchor of stability for Indian banks is their strong business franchises, which support their low-cost funding profiles, helping them maintain sizable lending margins to sustain pre-provision earnings.”

Moody’s also continues to assume a relatively high probability of systemic support, observing that the Indian government already provides strong ongoing support in the form of annual equity infusions for the public sector banks, and all banks are mandated to meet loan quotas for certain sectors of the economy. This implies a high degree of involvement by the government in the banking sector and related public accountability.

If needed, the credit ratings agency (CRA) believes that the government would provide extraordinary support in the form of unsecured loans and/or capital injections to both the public and the rated private banks.

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