Non-financial corporates in India will benefit from a healthy domestic growth and accommodative monetary policy, Moody’s Investors Service and its Indian affiliate ICRA Limited today said.
“Most non-financial corporates we rate in India will benefit from a healthy 7.5 per cent GDP growth in the country for 2016-17, and a pick-up in manufacturing activity will be broadly supportive of the business growth,” a joint statement by Moody’s Investors Service and ICRA quoted Moody’s V-P and Senior Credit Officer Vikas Halan as saying.
“But businesses remain vulnerable to the volatile Indian rupee as against the US dollar.”
ICRA said it expects corporate performance to be weighed down by over-leveraged large infrastructure groups.
Moody’s and ICRA also highlighted the difficulties in implementing high-profile policy changes, including the proposed goods and services tax.
“A failure to implement reforms could hamper investment levels in India against the backdrop of a weak global growth,” the statement said.
According to the statement, Moody’s expects upstream oil and gas companies to benefit from a lower fuel subsidy burden although low crude and domestic natural gas prices will continue to hurt profitability.
Refining and marketing companies, meanwhile, should benefit from healthy margins as demand growth outpaces expected capacity addition, it said.
For the auto sector, Moody’s expects retail sales volume to grow 6 per cent in 2016 on the back of sustained growth in passenger vehicles sales and a recovery in commercial vehicle sales.
Moody’s and ICRA also referred to an improving operating environment for Indian banks, which will lead to “slower addition to problem loans” over the next 12-18 months and “as a result, the banks’ credit metrics will stabilise”.
“While the stock of non-performing loans may continue to rise, the pace of new impaired loan formation in the current financial year will be lower than the levels seen in the past four years,” Moody’s V-P and Senior Credit Officer Srikanth Vadlamani said in the joint statement.
“A meaningful proportion of stressed loans have already been recognised as impaired while economic conditions are improving,” the statement added.
The statement said Moody’s believes that capital levels, however, are low for public-sector banks.
“Such banks exhibit common equity Tier 1 ratios of only 6 per cent-10 per cent, and their coverage of non-performing loans with loan-loss reserves averages 55 per cent,” it noted
The statement said ICRA believes that over the next 12-18 months, the credit profile of public-sector banks as a whole will be driven by their ability to reduce stress on assets, improve earnings and shore up capital.
On earnings, ICRA said credit provisioning by public sector banks will remain elevated over the next 12-18 months, given that reported net non-performing assets totalled 3 per cent of advances.
ICRA also believes that while credit growth for the public lenders may remain low until at least end-FY17, it is likely to outpace internal generation, thereby potentially adversely affecting capital adequacy.
“However if the public sector banks are allocated Rs 700 billion as promised by the government, credit growth will drop to 8-10 per cent,” ICRA’s Group Head of Financial Sector Ratings Vibha Batra added.