Moody’s changes outlook on India’s banking system to stable from negative

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COIMBATORE: Moody’s Investors Service has changed its outlook for India’s banking system to stable from negative because of the gradual improvement in the operating environment.

“The stable outlook on India’s banking system over the next 12-18 months reflects our expectation that the banks’ gradually improving operating environment will result in a slower pace of additions to problem loans, leading to more stable impaired loan ratios,” said Srikanth Vadlamani, a Moody’s vice-president and senior credit officer.

The deteriorating asset quality was the key driver of Moody’s negative outlook on India’s banking system since November 2011, he said. “However, the recovery in asset quality will be U-shaped rather than V-shaped, because corporate balance sheets remain highly leveraged,” Vadlamani stated.

The stable outlook is based on Moody’s assessment of five drivers — operating environment, which is improving, asset risk and capital that is stable, funding and liquidity (stable), Profitability and Efficiency (stable) and government support (stable).

On the operating environment, Moody’s expects that India will record GDP (gross domestic product) growth of around 7.5% in 2015 and 2016. “Growth has been supported by low inflation and the gradual implementation of structural reforms. An accommodative monetary policy should support the growth environment,” the agency said.

As for asset risk and capital, Moody’s says that asset quality will stabilise. In particular, while the banks’ stock of non-performing loans may continue to rise, the pace of new impaired loan formation in the current financial year ending March 31, 2016 will be lower than the levels seen in the past four years.

Capital levels, however, are low for public-sector (PSU) banks, according to Moody’s. “Such banks exhibit common equity tier-1 ratios of only 6%-10%, and their coverage of non-performing loans with loan-loss reserves averages 55%,” it said.

The Indian government (Baa3 positive) in July announced plans to inject Rs 70,000 crore into PSU banks over the next four years. “This is a clear credit positive, but this amount is still short of the banks’ overall capital requirements,” Moody’s stated.

“Ability to access equity capital markets remains key if the PSU banks have to address their capital shortfall,” it said.

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