Moody’s has revised the outlook for the Indian banking system from negative to stable, suggesting that asset quality has declined since the beginning. coronavirus The pandemic has been moderate and an improved operating environment will support asset quality.
Moody’s Investors Service said in its Banking System Outlook that India’s economy will continue to recover over the next 12-18 months and GDP will grow at 9.3 per cent in the fiscal year ending March 2022 and 7.9 per cent next year.
“Economic activity will accelerate credit growth, which is expected to be 10-13 per cent per annum,” he said. In addition, weak corporate finance and lack of funding in finance companies have been major downside factors for banks, but these risks have been mitigated.”
The basis for Moody’s amendments to the Indian banking system has been the limited effect that banks’ asset quality has degraded despite relatively limited regulatory support for borrowers. The quality of corporate loans has improved, indicating that banks have recognized and provisioned all old problem loans in this section. The quality of retail loans has declined, but to a limited extent, not because of massive job losses.
Moody’s Banking System Outlook said, “We expect asset quality to improve further, leading to a decline in credit costs, as economic activity normalises.”
The rating agency said the capital ratio in rated banks has increased in the last one year as most have issued fresh shares. The ability of public sector banks to raise equity capital from the market is particularly positive as it reduces their dependence on the government for capital. However, further increases in capital will be limited as banks will use most of the retained earnings to support the acceleration of credit growth.
The outlook further said that banks’ profitability will improve as debt-loss provisions decline. Banks’ return on assets will increase as credit costs will come down while banks’ core profitability will remain stable. If interest rates rise, the net interest margin will increase, but it will also result in a mark-to-market loss on banks’ large holdings of government securities.
In addition, funding and liquidity for both public and private sector banks will remain stable. The former enjoys public confidence due to sovereign backing, while the latter has stable credit profiles and strong deposit franchises.
Moody’s said it expects strong government support for rated public sector banks given their strong relationship with the government. For private sector banks, Moody’s determines the level of government support taking into account the systemic importance of each bank.
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