Moody’s keeps stable outlook for Indian banking system

The Indian economy will continue to recover from the temporary liquidity shock from demonetization, Moody’s said. (Reuters)

DUBAI: Moody’s Investors Service on Thursday maintained a stable outlook for the Indian banking system is stable, noting the country’s progress in managing legacy asset issues counteracting significant capital inadequacies some lenders continue to face.
Moody’s conclusions are contained in its just-released “Banking System Outlook — India, Asset quality at trough levels drives stable outlook”, where it rated 15 banks which together account for about 70 percent of assets in India’s financial system.
“The outlook for the system is also in line with the stable outlooks for 10 of the 15 banks we rate in this system and reflects a stable operating environment and improved prospects for asset quality, among other factors,” Srikanth Vadlamani, a Moody’s Vice President and Senior Credit Officer, said in a statement.
“Moody’s believes that the operating environment is — as indicated — stable. Our baseline scenario assumes GDP growth of 7.1 percent in the fiscal year ending in March 2018, the same pace as the prior year,” said Vadlamani.
While headline growth is robust, private investment remains relatively weak, Moody’s said.
“In the near term, the economy will continue to recover from the temporary liquidity shock from demonetization, while adjusting to the new goods and services tax (GST),” the ratings agency said.
India on July 1 implemented GST to replace numerous federal and state taxes as part of reform measures to cut red tape and increase tax revenues, and eventually fuel economic growth.
Finance Minister Arun Jaitley said the new tax structure should help the Indian economy grow by 2 percent.
“Indicators, such as net new nonperforming loan formation and problem loan ratios, suggest a bottoming of the credit cycle,” said Vadlamani, although declining asset quality in agriculture, and micro-businesses and SMEs pose risks.
Moody’s said that lending margins will be stable because a drop in funding costs following demonetization will likely offset pressure from re-pricing of loans to the marginal cost of lending rate.
Banks still face higher credit costs due to tighter provisioning requirements for stressed loans, but these charges will be lower in absolute terms, Moody’s said.