Indian banks move past worst of bad loans: Moody’s

India’s banking system is moving past the worst of its asset quality down cycle, global credit rating agency Moody’s Investors Service said in a new report.

This trend will support its stable outlook for the sector over the next 12-18 months, said the report titled "Banking System Outlook -- India: Bottoming Asset Cycle,Strong Liquidity Support Stable Outlook".

"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," said Srikanth Vadlamani, a Moody's Vice President and Senior Credit Officer.

Vadlamani said that the performance of India's state-owned and private banks continues to diverge.

"The state-owned banks will require significant capital over the next three years with limited access to the capital markets, while the private banks benefit from solid capitalisation and good profitability", he said.

Moody's outlook expresses its expectation of how bank creditworthiness will evolve in the system over the next 12-18 months.

The stable outlook is based on Moody's assessment of five drivers: Operating Environment (stable); Asset Risk and Capital (stable); Funding and Liquidity (stable); Profitability (stable); and Government Support (stable).

HEADLINE GDP

The operating environment for Indian banks is supported by a stabilizing economy. Moody's baseline scenario assumes headline GDP growth of 7.4 per cent over the next two years, compared with 7.3 per cent in 2015, with key drivers being a favorable monsoon season, ongoing public investment, and continued growth in foreign direct investment.

Asset quality will remain a negative driver of the credit profiles of most rated Indian banks, but the pace of deterioration should slow. Aside from legacy issues for some banks, the underlying asset trend for Indian banks will be stable because of the generally supportive operating environment, Moody’s has said.

Capital levels remain a key credit weakness for state-owned banks, and the announced capital infusion plans of the government fall short of the amount required for their full capitalization. However, Moody's says a potential way to bridge this capital shortfall would be to slow loan growth to the low single digits over the next three years.

Funding and liquidity remains a bright spot for the system, and will remain supported by Moody's expectation of relatively subdued loan growth during the outlook.

Profitability for the banks will reflect stabilizing net interest margins(NIMs) and credit costs. Moody's expects limited policy rate cuts over the next 12 months, which should help stabilize NIMs. Credit costs will remain high for the sector, but no higher than in recent years for the industry overall.

Moody's continues to believe that the state-owned banks will receive a very high level of systemic support, irrespective of their size. Recent government allocations, wherein weak smaller banks received a disproportionately higher share of capital, support this view.

For private banks, support will be determined by their systemic importance, and range from high to very high for Moody's rated universe.

Moody's rates 15 banks in India that together account for around 70 per cent of system assets. The ratings outlook on 11 of the banks is positive, reflecting Moody's positive outlook on the sovereign rating and the high degree of government support that could be expected for the banks, if needed.

srivats.kr@thehindu.co.in

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