Difficulties remain for Indian banks, says Moody's

The operating environment for Indian banks remains "difficult" though the business climate has improved significantly, international ratings agency Moody's Investors Services said today in its new Banking System Outlook for India.

Overall, the bulk of Indian banks' ratings are concentrated around the D category, though their outlook is stable.

As a result of the assessment, Moody's maintained that the financial strength ratings (FSRs) of Indian banks, which tend to be concentrated in the D category, "continue to be constrained by the difficult operating environment, underpinning its view that given the still relatively weak asset quality, the average quality of profits is highly dependent on interest income."

Moody's expectation of only moderate changes in the banks' earnings capacity and risk profile is reflected in the stable outlook assigned to the FSRs.

The public sector banks (PSBs) will continue to compete with their private sector and foreign rivals that are increasingly penetrating the untapped retail market, Moody's said.

"The evolution of the public sector banks' financial strength ratings will also to a high degree depend on their modernisation efforts as well as their ability to manage their business mix so as to contain their high exposure to cyclical industries that have been deteriorating over the past few years," Nondas Nicolaides, a Moody's analyst and author of the new report said in a media release.

"This has, up to a point, been achieved," the report said, noting that the high level of credit risk within the Indian context has shifted the PSBs' appetite towards the retail segment that is believed to be highly underbanked by international standards.

However, Moody's believes that the retail segment is, for the time being, better served by the more sophisticated private sector and foreign banks since, despite their limited branch networks, their superior infrastructure and better qualified staff ""compared with their public sector counterparts""allow them to offer a better quality of service and a wider range of products.

"Looking ahead, India's economic recovery and its ability to attract foreign and private investments will be critical for the development of a strong banking sector," the report said, adding that "A sustainable plausible improvement in troubled sectors such as steel, textiles and various other commodity industries would also have a positive effect over the medium to longer term if it leads to the removal of the non performing asset overhang that currently depresses banks' performance," the report said.

The report however is optimistic that the new Securitisation Act could also "play a constructive role in that direction".