The Hindu Business Line : Moody’s cautions banks on asset quality

New Delhi, June 6 Moody’s Investors Service has cautioned Indian banks that any rapid material deterioration in their asset quality, leading to pressure on their profitability and solvency positions, could prompt a change in their rating outlook to negative from stable.

Currently, the fundamental credit outlook for the Indian banking system is stable, according to Moody’s. This outlook expresses the rating agency’s view on the likely future direction of fundamental credit conditions in the industry over the next 12-18 months.

In its banking system outlook report for India, Moody’s have pointed out that the loan restructuring carried out in recent years across the system and the “seasoning” of the relatively new lending could indicate that the actual level of non-performing loans may be higher, just as the March 2008 year-end results suggest for a number of rated banks.

The report also noted that the banking system’s steady improvement in asset quality in recent years has been exerting upward pressure on the Bank Financial Strength Ratings (BFSR) of the rated banks despite the sharp rise in credit growth.

BFSR are a measure of the likelihood that a bank would require assistance from third parties such as its owners, its industry group or official institutions.

Stating that most Indian banks demonstrate healthy capital adequacy ratios, the Moody’s report says the key concern remains the ability of the weaker public sector banks (PSBs) and those PSBs that are close to the threshold of minimum government shareholding as well as some private sector banks to raise fresh capital, especially in view of the adoption of Basel-II accord. This could induce some level of consolidation in the market going forward.

Limited impact

The recent global credit crisis and liquidity crunch in the financial markets has had very limited to no impact on Indian banks. Only certain large banks with international operations have been mildly affected by asset price adjustments and have taken some minimal write-down because of the widening of spreads.

The report also said that focus on increasing fee-based income would be key to improving quality of earnings and maintaining future profitability. The profitability ratios of Indian commercial banks are relatively moderate but their core recurring income and profits are on a rising trend.

Public sector banks (PSBs) display marginally lower profitability than their private sector counterparts, while foreign banks in India appear to be most profitable. Going forward, the increasing disintermediation and competition for good quality credits could exert some pressure on revenue streams.

Robust loan growth

Moody’s report noted that the overall loan growth in the Indian banking system was robust, but has slowed somewhat, largely due to a significantly lower increase in retail loans, the driving force of growth for many banks in recent years.

The rating agency has cautioned that the retail loans have yet to be fully tested in a negative credit cycle and that certain banks may not have the comprehensive credit scoring and monitoring systems and tools in place for closely screening retail loans, which could prove challenging as delinquency rates have started rising in recent months.

More Stories on : Banking | Non-Performing Assets | Credit Market | Credit Rating

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