Build-up of non performing assets (NPAs) of public sector banks poses a risk to India sovereign credit rating, rating agency Moody’s said on Tuesday.
Moody’s has kept India in the lowest investment grade category “Baa3” with positive outlook.
“The main threat to the sovereign credit profile would be via a significant and prolonged worsening in asset quality at state-owned banks, beyond the recognition of bad loans currently underway, that causes contingent liabilities to crystallise on the government’s balance sheet,” it said in a report.
In India, NPA ratios of public sector banks – which hold more than 70% of total banking system assets and large amounts of government securities, and conduct government-directed lending – increased markedly in late 2015.
The NPAs of public sector banks’ rose by about Rs 1 lakh crore to 3.93 lakh crore at the end of December 2015, from about Rs 3 lakh crore at September-end.
This followed the Reserve Bank of India’s industry-wide asset quality review. “We expect further recognition of impaired loans. The fiscal costs of recapitalisations are likely to be larger than the government has budgeted,” Moody’s said.
Still, the fact that retail deposits are the primary source of funding for Indian banks and that most comply comfortably with liquidity requirements are important factors mitigating this risk, it added.
Moody’s had earlier estimated external capital requirements of eleven PSBs, that it rates, at Rs 1.45 lakh between FY16 to FY19. Moody’s estimates are much higher than the Indian government’s projection of Rs 1.1 lakh crore external capital requirement for all 22 public sector banks during the period. Out of this, the government would infuse Rs 70,000 crore in PSBs by FY19.
Moody’s also said a high level of government debt compared to similarly rated peers is a sovereign credit constraint for India.
“India’s government debt to GDP ratio, which we forecast to fall to 65.7% in 2016 from 67.5% in 2015, is well above the median for Baa-rated sovereigns but in a gradual declining trend,” it said.
Moody’s said India’s budget gap including state deficits would remain sizable at around 6% of GDP in 2016. It would require a faster economic growth for the ratio to decline. Moody’s cautioned that India’s government has little fiscal space to stimulate the economy if momentum were to slow.