Outlook for Indian banking system stable: Moody's

Global rating agency Moody’s on Thursday said its outlook for the Indian banking system is stable on improved prospects for asset quality.

The progress in tackling the system’s legacy asset issues (stressed assets) offsets the significant capital shortfalls some banks continue to face.

"The outlook for the system is also in line with the stable outlooks for 10 of the 15 banks we rate in this system. It reflects a stable operating environment and improved prospects for asset quality, among other factors," said Srikanth Vadlamani, a Moody's Vice President and Senior Credit Officer.

The indicators such as net new non-performing loan (NPL) formation and problem loan ratios suggest bottoming of the credit cycle. However, deteriorating asset quality in agriculture, and micro, small- and medium-sized enterprise (MSME) portfolios pose risks, it said. 

The outlook expresses the expectation of how bank creditworthiness will evolve into the system over the next 12-18 months.

The 15 banks rated by Moody's in India together account for about 70 per cent of assets in the system.

Moody’s said the operating environment is -- as indicated -- stable. Indian economy is expected to grow at 7.1 per cent (baseline scenario) in the fiscal year ending in March 2018, the same pace as the prior year, Vadlamani said.

While headline growth is robust, private investment remains relatively weak. In the near term, the economy will continue to recover from the temporary liquidity shock from demonetisation, while adjusting to the new goods and services tax (GST).

Referring to capital adequacy of banks in India, the rating agency said the capitalisation will continue to bifurcate public and private sector banks.  The common equity Tier 1 (CET1) ratios of public sector banks remain far below those of their private sector peers.

The gap is likely to persist due to the government's reluctance to infuse more capital into private sector banks. However, the system's overall loan loss coverage will likely further improve, which, coupled with subdued loan growth, will ease pressure on capitalisation.

Profitability remains low but is improving. Lending margins will be stable due to a drop in funding costs. Demonetization will likely offset pressure from re-pricing of loans to the marginal cost of lending rate (MCLR), Moody’s said.

Banks still face higher credit costs due to tighter provisioning requirements for stressed loans, but these charges will be lower in absolute terms. Smaller treasury gains, however, will weigh on profitability, it added.

• Most standard restructured loans are now NPA
• Asset quality forbearance only in limited events
• Quicker recognition of problem loans
• Agriculture, MSME loans showing credit weakness
• GDP growth to stay robust, with strong domestic demand
• Temporary economic disruption from demonetisation and GST implementation