Moody’s Outlook For Banking System Is Stable for the Next 12-18 months

New Delhi, July 29: With the improvement in solvency, Indian banking system will remain stable for the next 12-18 months, but the economic slowdown will cast a shadow over it.

“While the banks’ operating environment will stay stable, the economic slowdown in India will pose challenges to the banks’ asset quality,” said Alka Anbarasu, a Vice President and Senior Credit Officer at Moody’s.

The stable outlook is based on Moody’s assessment of six drivers: operating environment (stable), asset quality (stable), capital (stable), funding and liquidity (stable), profitability and efficiency (improving), and government support (stable).

Moody’s explains that economic growth in India over the next 12-18 months will remain weaker than in prior years, at a time when the banks are recovering from legacy nonperforming loans (NPLs). In addition, despite stability in the country's macro fundamentals, stress among nonbank financial institutions (NBFIs) will continue to constrain economic growth.

“The formation of new NPLs in the non-financial corporate segment will slow, helped by the improved financial health of corporates and recoveries from legacy problem loans,” added Anbarasu. “However, stress at the NBFIs is a risk to the banks' asset quality because the banks have large exposures to the sector,” he said. 

In addition, the moderation of economic growth could lead to the creation of new NPLs in the retail and small and medium enterprise segment.

Capital infusions from the government will help public sector banks maintain their capital ratios at current levels. As for Moody’s-rated private sector banks, some are in the process of raising new capital from the equity capital markets, as their asset growth outstrips internal capital generation.

System wide profitability will improve but stay weak, and funding and liquidity will remain stable.