Moody’s raises banking sectors’ outlook to ‘stable’

The Indian banking sector got a major boost on Monday when global ratings firm Moody’s Investors Service changed its outlook for the sector to “stable” from “negative”, following improvement in the business environment, and due to a reduction in the overall bad loans.

Projecting stable growth rate for India, Moody’s also said the economy would grow at 7.5% in the current fiscal and improve marginally in the following year.

In 2011, Moody’s had rated the Indian banking industry “negative”, driven by the falling asset quality in banks. The lenders had been hit hard by non-payment of dues as the companies suffered losses in the slowdown following the liquidity crisis of 2009. The following prolonged pause in business decisions by the previous UPA government and lack of approvals to projects compounded companies’ ability to service bank loans.

“While the stock of non-performing loans may continue to rise, the pace of new impaired loan formation in the current financial year, will be lower than the levels seen in the past four years,” Srikanth Vadlamani, vice-president and senior credit officer, Moody’s, said in a report titled ‘Banking System Outlook — India: Gradual Improvement in Operating Environment Drives Stable Outlook’. “A meaningful proportion of stressed loans has already been recognised as impaired, while economic conditions are improving. However, the recovery in asset quality will be U, rather than V-shaped, because corporate balance sheets remain highly leveraged.”

Profitability of Indian banks has been hit hard with state-run banks exposed sharply with 14% of their assets, described as bad or non-performing. Private banks had a much lower non-performing loan percentage of 4.8%. “The operating environment for Indian banks is improving, though only gradually. We expect that India will record GDP growth of around 7.5% over the next two years, significantly more robust than the 6.2% average over 2011-13 when the economy went through a downturn. An accommodative monetary policy should support the growth environment,” he said.

Low-levels of capital are a key weakness for public-sector banks (PSBs) in India. The PSBs have common equity Tier 1 ratios of only 6-10%. In July, the government announced plans to inject `70,000 crore over four years, but even this amount is short of the overall capital requirements.