Outlook on Indian banking system remains negative: Moody's
2012-12-04 10:43:32
Moody's Investors Service said its outlook on the Indian banking system for the next 12-18 months would remain negative, reflecting the continued challenging nature of its domestic operating environment.
The global credit rating agency has had a negative outlook on the Indian banking system since November 2011
Vice President and Senior Analyst Vineet Gupta said, "This environment is characterized by slow economic growth, high inflation, high interest rates, and a weak local currency, and we expect these factors to lead to a further deterioration in asset quality, an increase in provisioning costs, and a fall in profitability,"
Further, considering the high level of loan growth which, at around 15 percent annually, is expected to continue outstripping internal capital generation, then most of the Moody's-rated Indian banks will be challenged to maintain capitalization levels at current levels, and some will even need to raise new capital externally," he said.
Furthermore, Moody's views the loan classification - more particularly with regards to restructured loans - and provisioning practices in India as weak.
"Loan classification and provisioning requirements mask the extent of the banks' asset quality and capital challenges," Gupta said.
"On the positive side, one anchor of stability for Indian banks is their strong business franchises, which support their low-cost funding profiles, helping them maintain sizable lending margins to sustain pre-provision earnings,"Moody's said in a statement.
Moody's also continues to assume a relatively high probability of systemic support, observing that the Indian government already provides strong ongoing support in the form of annual equity infusions for the public sector banks, and all banks are mandated to meet loan quotas for certain sectors of the economy. This implies a high degree of involvement by the government in the banking sector and related public accountability.
Moody's rates a total of 15 public sector and private sector commercial banks, which together accounted for about 66 percent of the system's estimated total assets as of March 2012. Their average (asset-weighted) standalone credit strength is D+, or ba1 on the long-term rating scale, whereas their average foreign currency long-term deposit rating is Baa3, which is investment grade.