Moodys retains negative outlook on banks

Written by fe Bureau | Mumbai | Updated: Oct 30 2014, 06:39am hrs
Credit rating agency Moodys on Wednesday retained its negative outlook on the Indian banking system, citing an

increasing number of non-performing loans in the

books of government-controlled banks.

It also cited the decrease in profit of the public sector banks and an increase in the number of corporate loans in their books as reasons behind the negative outlook.

The negative outlook on the Indian banking system pertains mainly to the public sector banks, which represent more than 70% of total banking system assets, said Gene Fang, a Moody's vice-president and senior credit officer. The agency is of the view that high leverage in the corporate sector could prevent any meaningful recovery in asset quality over the next 12-18 months.

On Tuesday, Standard and Poors had upgraded its outlook for the Indian banking sector to 'stable'.

Moodys looks at India's banking system in terms of five factors: Operating environment (which is classified as stable), asset quality and capital (deteriorating), funding and liquidity (stable), profitability and efficiency (deteriorating) and systemic support (stable).

K Subrahmanyam, executive director of Union Bank, told FE: The ratings of these agencies are dependent on their perception of the Indian economy and its banking system. Banks are a part of the economy, so the performances are dependent on the way the economy functions.

However, as per the report, funding and liquidity will remain stable, given the high domestic savings rates and a low reliance on market funding. According to the report, India's broad corporate sector is highly leveraged, with a debt-to-equity ratio of more than 3.0x. In particular, corporates engaged in infrastructure projects face both structural and cyclical challenges.

"Going forward, India's corporate sector will remain highly leveraged, representing an obstacle to a cyclical recovery in asset quality." Said Fang. Moody's rates four private sector and 11 public sector banks in India that collectively account for 67% of system assets. The negative outlook on the banking system is consistent with the negative rating outlooks on the bank financial strength ratings (BFSR) of 10 of the 15 rated banks.

If senior creditors of

an ailing public sector bank were required to absorb

losses, this could easily be risk contagion of financial distress to other public sector banks, given the similar business models and credit characteristics, said the report.

PSBs TO BLAME

Rating agencys report cites fall in profit of public sector banks and increase in the number of corporate loans in their books as reasons behind negative outlook

Says outlook mainly pertains to PSBs, which represent over 70% of total banking system assets