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Moody's Investors Service on Wednesday said that recognition of bad loans by banks will reduce their profitability in the short-term but will be beneficial in the long-term.
"The final stage of a multi-year initiative by India's central bank to push banks to recognise problem assets more accurately will reduce profitability for the sector in the near term, but produce benefits over the long-term," it said in a statement.
The Reserve Bank of India has recently tightened the norms for banks to recognise stressed assets and has also scrapped the loan restructuring schemes.
"While this push will increase the already-high non-performing loan (NPL) ratios and provisioning burdens for India's banks, and strain their profitability in the near term, cleaner balance sheets in the long run will be credit positive for the sector," said Alka Anbarasu, Moody's Vice President and Senior Analyst.
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