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Moody's Investors Service on Wednesday said that the final stage of a multi-year initiative by RBI to push banks to recognise problem assets more accurately will reduce profitability for the sector in the near term, but produce benefits over the longer term.
While this push will increase the already-high non-performing assets (NPAs) ratios and provisioning burdens for India's banks, and strain their profitability in the near term, cleaner balance sheets in the long run will be credit positive for the sector, Moody's said in a statement.
The Reserve Bank of India's (RBI) rules are credit positive because they provide a clearer, time-bound process for resolving stressed assets and will prevent a future buildup of problem loans in the system, it said.
"Also, we have already been taking into account the system's restructured assets, not just non-performing loans (NPLs), when assessing the banks' credit profiles. So shifts in the composition of the broader asset pool will not have much bearing on our assessment of the banks' asset quality," it said.
Under the new rules for bad debt resolution that the RBI implemented in March 2018, banks can no longer resort to various loan restructuring schemes to delay the recognition of NPAs.
Although banks have recognised many loans as NPAs following an extensive inspection of loan books by the RBI in 2015, they still hold large volumes of restructured loans, a large share of which will become NPAs in the coming quarters, it said.
As banks reclassify these assets, it said, NPA ratios will gradually rise, but once this process is complete, they will stabilise and eventually decline substantially.
Increased provisioning will hurt the banks' profitability, and weaker public sector banks in particular will continue to report losses in the next fiscal year, adding pressure on their capital ratios, it said.
Nevertheless, the near-term impact of this profitability deterioration on their credit profiles will be largely offset by planned capital infusions from the government, it added.
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