Global rating agency Moody’s Investors Services has said the pace of bad loan formation is going to slow down, resulting in a stable outlook for the Indian banking sector over the next 12-18 months.
“While the stock of impaired loans may still increase during the horizon of this outlook, the pace of new impaired loan formation should be lower than what it has been over the last few years,” Moody’s VP and senior credit officer Srikanth Vadlamani said. India’s banking system is moving past the worst of its asset quality down cycle, supporting its stable outlook for the sector over the next 12-18 months, it said in a report.
“The performance of India’s state-owned and private banks continues to diverge,” Vadlamani said. “The state-owned banks will require significant capital over the next three years with limited access to the capital markets, while the private banks benefit from solid capitalisation and good profitability,” he said.
Banks which are racing to clean up their balance sheets came out with a whopping 96 per cent jump in non-performing assets (NPAs), or loans which remain overdue for a period of more than 90 days, to Rs 629,774 crore as of June 2016 as against Rs 320,553 crore in the same period last year. The sharp rise follows the Reserve Bank instruction to banks to classify around 130 stressed accounts as NPAs and make adequate provisioning for them.
State Bank of India led the list with its gross NPAs soaring to Rs 101,541 crore during the June quarter from Rs 56,420.77 crore in the year-ago period. Bad loans of PSU banks rose from Rs 285,748 crore last year to Rs 571,443 crore by June 2016, indicating that the the RBI’s asset quality review has unearthed Rs 285,695 crore bad debts in their books.
Moody’s outlook expresses its expectation of how bank creditworthiness will evolve in the system over the next 12-18 months. The stable outlook is based on Moody’s assessment of five drivers — stable operating environment, asset risk and capital, funding and liquidity, profitability, and Government Support. The operating environment for Indian banks is supported by a stabilising economy, it said.
Moody’s baseline scenario assumes headline GDP growth of 7.4 per cent over the next two years, compared with 7.3 per cent in 2015, with key drivers being a favourable monsoon season, ongoing public investment, and continued growth in foreign direct investment.
Asset quality will remain a negative driver of the credit profiles of most rated Indian banks, but the pace of deterioration should slow.
Moody’s said it expects limited policy rate cuts over the next 12 months, which should help stabilise Net Interest Margin (NIMs). Credit costs will remain high for the sector, but no higher than in recent years for the industry overall. It also believes that state-owned banks will receive a very high level of systemic support, irrespective of their size.
Moody’s said that besides legacy issues for some banks, the underlying asset trend will be stable because of the generally supportive operating environment. “Capital levels remain a key credit weakness for state-owned banks, and the announced capital infusion plans of the government fall short of the amount required for their full capitalisation,” it said.
However, a potential way to bridge this capital shortfall would be to slow loan growth to the low single digits over the next three years, it added. Funding and liquidity remains a bright spot for the system, and will remain supported by Moody’s expectation of relatively subdued loan growth during the outlook. Profitability for the banks will reflect stabilising net interest margins (NIMs) and credit costs.
For private banks, systemic support will be determined by their systemic importance, and range from high to very high for Moody’s rated universe. Moody’s rates 15 banks in India that together account for around 70 per cent of system assets.