Bombay, October 19 (IANS): Moody’s revised the outlook for the Indian banking system from stable to negative, suggesting that the deterioration in asset quality since the onset of the coronavirus pandemic has been moderate and that an improving operating environment will support asset quality.
In its outlook on the banking system, Moody’s Investors Service said the Indian economy will continue to recover over the next 12-18 months, with GDP growth of 9.3% in the fiscal year ending in March 2022 and 7.9% the following year.
âThe recovery in economic activity will boost credit growth, which we forecast at 10-13% per annum. In addition, weak corporate finances and funding constraints for financial corporations have been key negative factors for companies. banks, but those risks have diminished, “he said. .
Moody’s review of the outlook for the Indian banking system is based on the limited impact of the pandemic on the deterioration in the quality of banks’ assets despite relatively limited regulatory support for borrowers. The quality of business loans has improved, indicating that banks have recognized and provisioned all legacy problem loans in this segment. The quality of personal loans deteriorated, but to a limited extent as there were no large-scale job losses.
âWe expect asset quality to improve further, leading to lower costs of credit, as economic activity normalizes,â Moody’s said of the outlook for the banking system.
The rating agency said capital ratios have increased at all rated banks over the past year as most have issued new shares. The ability of public sector banks to raise equity in the market is particularly favorable to credit because it reduces their dependence on the government for capital. However, a further capital increase will be limited as banks will use most of the retained earnings to support an acceleration in loan growth.
The outlook further indicates that bank profitability will improve as loan loss provisions decline. Bank returns on assets will rise as the costs of credit fall while banks’ core profitability is stable. If interest rates rise, net interest margins will rise, but this will also cause mark-to-market losses on banks’ large holdings of government securities.
In addition, funding and liquidity will be stable for public and private sector banks. 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 government support to remain strong for rated public sector banks, given their close ties to the government. For private sector banks, Moody’s determines the level of government support taking into account the systemic importance of each bank.