The Hindu Business Line : Moody’s assigns stable rating for Indian banks

Driving factors
Robust credit growth, solid financial metrics and strong deposit franchise
Surge in retail loans diversifies banks’ loan portfolios
Strong liquidity on the back of stringent prudential norms

G. Srinivasan

New Delhi, July 11 Moody’s rating agency has given stable outlook for India’s banking industry, stating that the rating is driven by relatively “solid financial metrics amid a benign operating environment conducive to credit growth”.

In its banking system outlook on India, released in Hong Kong today, Moody’s Investor Service said the stable rating outlook for Indian banks reflects the country’s robust credit growth against the backdrop of a favourable economic milieu, as well as improvements in the banks’ overall financial metrics and strong deposit franchises.

Stating that implicit government support for systemically important banks has lifted the global local currency (LLC) deposit ratings of most rated banks, it said Moody’s new rating approach in assigning Bank Fundamental Strength Ratings (BFSRs) and deposit/debt ratings through its joint default analysis methodology has benefited most of the Indian banks.

Scope for consolidation

Moody’s said there is scope for consolidation in India’s relatively crowded and fragmented banking system, which is likely to increase as competition intensifies. “Successful consolidation would result in a more efficient system less vulnerable to shocks in the economy, with posting rating implications,” it said, adding that “consolidation in India has so far been slow, presenting challenges with regard to rationalisation of branches and staff”.

It further said the Indian economy continues its growth trajectory with GDP growing at 9.4 per cent during the fiscal year ended March 2007.

This robust macroeconomic environment continues to bolster the financial performance of Indian banks, which are faced with “a broad-based credit demand, with the industrial sector having picked up and the corporate sector showing increased credit appetite, together with robust growth in retail loans and in mortgages in particular”.

The surge in retail loans diversifies the banks’ loan portfolios, traditionally dominated by industry credits. It, however, cautioned that these loans are as yet untested in a negative credit cycle and said that a full credit cycle test of the new loans amid unfavourable economic conditions could be a decisive ratings driver for Indian banks. “Delinquency rates for unsecured retail loans appear to be on the rise based on the preliminary full year fiscal 2007 results of some banks”, the agency said.

Mounting competition

Noting that there is mounting competition in the Indian banking system stemming from the more dynamic private sector banks while the foreign banks have yet to exploit their full potential, Moody’s said the need for ongoing technological transformation remains a challenge for the public sector banks together with the inflexible and inefficient labour force that hampers their competitiveness.

While taking note of some steps being taken in the right direction by the authorities in this context, it said that these are implemented at a relatively slow pace.

Taking the ongoing endeavour of the RBI positively to strengthen the regulatory and supervisory framework with increasingly stringent norms and regulations, Moody’s said Basel II comes into effect in March 2008 with most major banks prepared to adopt the standardised approach, even some weak banks might enjoy some level of forbearance until they are positioned to fully implement the accord.

Positive features

Other positive features for the Indian banking system include the strong liquidity across the system on the back of stringent prudential norms, a well as improved credit risk profile with a declining level of non-performing loans. The PSBs robust deposit franchise is a core rating driver, even as the banks are increasingly tapping the capital markets to raise resources, as deposits are growing at a slower pace than loans.

It also voiced concern over the banks’ still relatively undiversified earnings profile geared towards interest income, as well as sizeable portfolios of fixed income securities that bring about elevated interest rate risk.

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