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Indian banking outlook stable, worst asset quality cycle over

Moody’s said while the stock of impaired loans may still increase during the horizon of this outlook, the pace of new impaired loan formation should be lower than what it has been over the last few years.

By: | Mumbai | Published: September 20, 2016 6:19 AM
Moody’s says private banks could report faster accretion of bad loans Moody’s says private banks could report faster accretion of bad loans

Credit rating agency Moody’s on Monday said that India’s banking system is moving past the worst of its asset quality down cycle and therefore the outlook is expected to be stable over the next 12-18 months.

“While the stock of impaired loans may still increase during the horizon of this outlook, the pace of new impaired loan formation should be lower than what it has been over the last few years,” said Srikanth Vadlamani, vice-president and senior credit officer, Moody’s.

Vadlamani said that while public sector banks have the highest rate of impaired assets, some private sector banks who have large exposure to stressed companies could report faster accretion of bad loans. “The incremental growth will be higher for certain private sector banks who have large exposure to power, coal, steel and infrastructure sectors,” he said.

According to Vadlamani, the performance of state-owned and private banks continues to be diverge. “While the state-owned banks will require significant capital over the next three years with limited access to the capital markets, the private banks benefit from solid capitalisation and good profitability,” he added.

The stable outlook, Moody’s said, is based on its assessment of five drivers: operating environment (stable); asset risk and capital (stable); funding and liquidity (stable); profitability (stable); and government Support (stable).

“Asset quality will remain a negative driver of the credit profiles of most rated Indian banks, but the pace of deterioration should slow. Aside from legacy issues for some banks, the underlying asset trend for Indian banks will be stable because of the generally supportive operating environment,” he explained.

While capital levels remain a key credit weakness for state-owned banks, the announced capital infusion plans of the government fall short of the amount required for their full capitalisation, Moody’s said in a statement. However, it believes that a potential way to bridge this capital shortfall would be to slow loan growth to the low single digits over the next three years.

“The reason capital adequacy levels of public sector banks did not deteriorate despite reporting huge losses in FY16 is the absence of loan growth and an ensuing stagnancy in the balance sheet,” Vadlamani said.

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