Global rating agency Moody's today retained its bleak outlook for the domestic banking industry saying the overall economic conditions are tough and the number of bad debts increasing in the system.
"The fundamental credit outlook for the Indian banking system remains negative, reflecting the currently challenging economic conditions and the rising level of problem loans," Moody's said in a report.
Moody's had changed its outlook for the domestic banking systme from 'stable' to 'negative' in January 2009. Moody's main concern is the deteriorating asset quality and the high volume of restructured loans of banks.
During the past fiscal, the absolute level of gross non-performing loans (NPLs) for all commercial banks in the country increased by 22.5 per cent, compared with 11.9 per cent the year before.
"Although the NPL expansion must be seen in the context of the problems faced by banks globally over the past couple of years, the rapid expansion of retail lending in recent years, combined with the slowdown of the Indian economy, has led to increased delinquency rates," the report said.
The rating agency further said that the negative outlook expresses the rating agency's view on the likely future direction of fundamental credit conditions in the industry over the next 12-18 months.
The domestic banking system remains largely in the hands of the public sector bank, with almost 72 per cent assets held by PSU banks, while the balance is held by private sector (19.6 per cent) and foreign banks (8.5 per cent).
However, competition has intensified with the growth in the two smaller sectors, the rating agency said. "Although these entities generally still lack the size to pose a significant franchise threat to PSBs, their greater flexibility and more sophisticated infrastructure allow them to provide superior levels of customer service," Moody's said.
Further, the rating agency's key concern in terms of capitalisation remains the ability of certain public sector banks that are close to the 51 per cent government shareholding threshold to raise fresh capital to fund their growth.
However, Moody's believes that the local banks' practices are generally appropriate for the risks they take, given that regulatory limits and the banks' generally conservative risk appetites do not expose them to any high or complex risks.
It also said profitability of the country's commercial banks has been improving in recent years with core income benefiting from the high lending environment and net interest income rising sharply in the last fiscal.
