Moody’s Investors Service, on Monday, cautioned that economic growth in India over the next 12-18 months will remain weaker than the previous years, which, in turn, could lead to the creation of new non-performing loans (NPLs) in the retail and small- and medium-enterprise segment. However, it said its 12-18 month outlook on the banking system in India is stable.

“While the banks’ operating environment will stay stable, the economic slowdown in India will pose challenges to the their asset quality,” said Alka Anbarasu, Vice-President and Senior Credit Officer.

Economic growth will remain weaker than previous years at a time when banks are recovering from legacy non-performing loans (NPLs), the global credit rating agency said in a statement.

In addition, despite stability in the country’s macro fundamentals, stress among non-banking financial institutions (NBFIs) will continue to constrain economic growth. “The formation of new NPLs in the non-financial corporate segment will slow, helped by the improved financial health of corporates and recoveries from the legacy problem loans.

“However, stress at the NBFIs is a risk to the banks’ asset quality because banks have large exposures to the sector,” said Anbarasu.

Capital infusions from the government will help public sector banks maintain capital ratios at current levels, the agency said.

As for Moody’s-rated private sector banks, some are in the process of raising new capital from the equity capital markets, as their asset growth outstrips internal capital generation.

System-wide profitability will improve but stay weak, and funding and liquidity will remain stable.

The stable outlook is based on Moody’s assessment of six drivers: operating environment (stable), asset quality (stable), capital (stable), funding and liquidity (stable), profitability and efficiency (improving), and government support (stable).

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