Moody’s warns on Indian banks’ asset quality

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SummarySays outlook on banking sector stays negative; terms provisioning norms of Indian banks weaker than global standards.

Indian banks’ asset quality is far worse than being reported as provisioning norms prescribed to them are weak compared with international standards, global rating agency Moody's Investor Service said on Tuesday.

“We view the loan classification (more particularly with regards to restructured loans) and provisioning practices in India as weak and we believe they mask the extent of the banks’ asset quality and capital challenges,” the agency said in a special report on the Indian banking sector.

Moody's predicts that both NPAs and restructured loans will rise further for banks. The rating agency has maintained its outlook on the banking system as ‘negative’.

Most Indian banks, especially in the public sector, have seen a sharp rise in bad loans over the last one year, apart from being saddled with a huge restructured portfolio as weak economic growth and high interest rates hit debt servicing capacity of companies.

The country’s largest lender, the State Bank of India, reported gross NPA of around 5.15% for July-September. Public sector banks account for around 70% of total loans given to corporates.

Moody’s said the true picture of Indian banks’ asset quality can be seen only if restructured loans are combined with NPAs. “This is because loan classification rules allow banks to report as ‘restructured loans’ some assets that would be reported as impaired in other jurisdictions,” the rating agency said.

Moody's said that the combined NPL and restructured loan ratio of 7.63% at end-March 2012 more accurately reflects the economic position of banks as opposed to the reported 2.95% NPA ratio.

It said by end-September, restructured assets of banks were around 6% of total loans.

An internal working group of the Reserve Bank of India is currently reviewing norms for restructured loans and the central bank will soon issue final guidelines. The panel has recommended tightening of provisioning norms for loans restructured.

Moody's said that the RBI norm that requires banks to provide a provisioning coverage of 15% against delinquent loans of up to 12 months is lax. Combined with restructured loans, the required coverage ratio could be around 27%, the agency said. On banks’ capital levels, too, Moody's sounded worried and said that the current adequacy levels are not particularly strong.

Indian banks would need additional capital to finance loan growth, meet rising credit costs and maintain adequacy norms, Moody's said. On the positive side, Moody's said that the strong franchise of Indian banks and the government's backing in the case of

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