Moody’s Investors Service on Tuesday said its outlook on the Indian banking system for the next 12-18 months remains negative, reflecting the continued challenging nature of its domestic operating environment.
The global credit rating agency has had a negative outlook on the Indian banking system since November 2011.
“This environment is characterised by slow economic growth, high inflation, high interest rates, and a weak local currency, and we expect these factors to lead to a further deterioration in asset quality, an increase in provisioning costs, and a fall in profitability,’’ said Vineet Gupta, Moody’s Vice-President and Senior Analyst.
Further, considering the high level of loan growth which, at about 15 per cent annually, is expected to continue outstripping internal capital generation, then most of the Moody’s-rated Indian banks will be challenged to maintain capitalisation levels at current levels, and some will even need to raise new capital externally, Gupta added.
Loan classification
Furthermore, Moody's views the loan classification — more particularly with regards to restructured loans — and provisioning practices in India as weak.
“Loan classification and provisioning requirements mask the extent of the banks’ asset quality and capital challenges,’’ said Gupta.
Business franchises
On the positive side, Moody’s, in a statement said one anchor of stability for Indian banks is their strong business franchises, which support their low-cost funding profiles, helping them maintain sizeable lending margins to sustain pre-provision earnings.
Moody’s is continuing to assume a relatively high probability of systemic support, observing that the Indian Government already provides strong ongoing support in the form of annual equity infusions for the public sector banks, and all banks are mandated to meet loan quotas for certain sectors of the economy.
This implies a high degree of involvement by the Government in the banking sector and related public accountability.