Moody’s has turned optimistic on the Indian banking sector, changing its outlook to “stable” from “negative”. Bloomberg TV India caught up with Srikanth Vadlamani, Vice-President and Senior Credit Officer for financial institutions at Moody’s, to get an insight of the sector.
Can you elaborate on the changes in the outlook of the banking sector?
Just to give it a perspective, we had been negative on the Indian banking sector since 2011. After four years we have moved on this table and the outlook is primarily on the asset quality. Now let us be clear on what we are not saying. We are not saying that the stock of non-performing loans (NPLs) or impaired loans has peaked out. We do believe that there will be more to come.
Last year, the 11 public sector banks added around ₹120,000 crore of net new impaired loans.
We estimate that this year that number will be around ₹70,000-80,000 crore and will keep going down.
We think we are coming closer to the end of the cycle, where the pace of new build on formation rates will start coming down compared to what we have seen over the past three-four years.
There have been some specific sectors that have been problematic. Where is the pain really easing?
There are two sectors where we still think there is more pain to come from an under-recognition perspective — these are iron and steel, and power. In iron and steel, the problem is because of the price movements that they have seen over the past year and the import increases that we have seen from China.
And in power, it has been actually a much more long-standing problem. Now what we are saying is that even after factoring in issues coming in from both these sectors, we believe our stable outlook is warranted.
We say ₹70,000-80,000 crore of new impaired loans are going to be formed this year and the number is still high because of these two sectors. So out of these sectors we believe there has already been a significant amount of recognition. So, in other sectors, we believe the pace of new build formation should significantly taper off.
Are the formation of joint lenders’ forums (JLFs) and new norms on asset recognition helping in solving the NPA problem?
In term of the regulatory moves over the past two years, there have been quite a few significant positive ones — the JLFs and others stand out. But have they basically ensured that there is total recognition of new impaired loans? We are not so clear because it has to work both ways.
On the one hand you have got JLF and other mechanisms which have pushed banks to proactively look at bad loans.
But then you have got other schemes — the one that really stands out is the 5/25 scheme, which has allowed banks to extend loan tenures without having to make public disclosure. So it has worked both ways.
On the balance we believe that the RBI action has been positive.