Bad Loans A Huge Threat for Sov­er­eign Credit Pro­file

Risk is largely due to high corp lever­age

The Economic Times - - Economy: Macro, Micro & More - Our Bureau

New Delhi: A sig­nif­i­cant and pro­longed de­te­ri­o­ra­tion in as­set qual­ity of state-run banks is the main threat to In­dia’s sov­er­eign credit pro­file, Moody’s In­vestors Ser­vice has said, while also men­tion­ing high govern­ment debt as a drag. The Amer­i­can rat­ing agency has a pos­i­tive out­look on In­dia’s Baa3 sov­er­eign rat­ing.

“The main threat to the sov­er­eign credit pro­file would be via a sig­nif­i­cant and pro­longed wors­en­ing in as­set qual­ity at state-owned banks, be­yond recog­ni­tion of bad loans cur­rently un­der way, that causes con­tin­gent li­a­bil­i­ties to crys­tallise on the govern­ment’s bal­ance sheet,” Moody’s said in a re­port on Asia-Pa­cific sov­er­eigns.

Risk is largely due to high cor­po­rate lever­age and its spillover to banks, ac­cord­ing to the agency. “In In­dia, cor­po­rate debt stands at 49.9% of GDP, and has been broadly stable for five years. How­ever, poor prof­itabil­ity and con­cen­tra­tion of lever­age sug­gest some risk,” the re­port said.

It said non-per­form­ing loan ra­tios of pub­lic sec­tor banks in­creased markedly in late 2015, fol­low­ing RBI’s in­dus­try-wide as­set qual­ity re­view. “We ex­pect fur­ther recog­ni­tion of im­paired loans,” the re­port said.

The fis­cal cost of re­cap­i­tal­i­sa­tion is likely to be larger than the govern­ment has bud­geted, the agency said. “Sig­nif­i­cant and ex­tended as­set qual­ity or prof­itabil­ity pres­sures on sta­te­owned banks would hurt the sov­er­eign bal­ance sheet,” it said, clearly stat­ing the risk.

The el­e­vated govern­ment debt is the other risk to In­dia’s sov­er­eign credit risk. “Govern­ment debt lev­els are el­e­vated and pose a sov­er­eign credit constraint for In­dia,” the agency said. High growth can help bring down debt lev­els, though, it said.

Ac­tions by pol­icy mak­ers are likely to en­hance medium-term eco­nomic strength

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