MUMBAI: Indian banks’ outlook is set to stabilise as asset quality concerns bottom out according to global ratings firm Moody’s.
The statement is significant considering that most banks have been reporting losses or nominal profit in recent quarters as they have been cautious to expand their loan books on asset quality concerns. “India’s banking system is moving past the worst of its asset quality down cycle, supporting its stable outlook – Baa3- over the next 12-18 months.” Moody’s said in a report.
“While the stock of impaired loans may still increase during the horizon of this outlook, the pace of new impaired loan formation should be lower than what it has been over the last few years” said Srikanth Vadlamani, a Moody’s Vice President and Senior Credit Officer.
Moody’s stable outlook is based on five parameter which it assessed to be stable. They include, operating environment; asset risk and Capital; funding and liquidity; profitability; and government support.
The operating environment for Indian banks is supported by a stabilising economy. Moody’s baseline scenario assumes headline GDP growth of 7.4% over the next two years, compared with 7.3% in 2015
Capital levels remain a key credit weakness for state-owned banks, Moodys said. The government’s capital infusion plans fall short of the amount required for their full capitalization. However, the ratings firm has said that a potential way to bridge this capital shortfall would be to slow loan growth to the low single digits over the next three years.
Profitability for the banks will reflect stabilizing net interest margins (NIMs) and credit costs. Moody’s expects limited rate cuts by the central bank over the next 12 months, which should help stabilize NIMs.
It expects state-owned banks to receive a very high level of systemic support, irrespective of their size. Recent government allocations, wherein weak smaller banks received a disproportionately higher share of capital, support this view, it said. For private banks, support will be determined by their systemic importance, and range from high to very high for Moody’s rated universe. Moody’s rates 15 banks in India that together account for around 70% of system assets.