Moody’s maintains negative outlook on Indian banks
The negative outlook on the Indian banking system pertains mainly to the public-sector banks, says Gene Fang
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Mumbai: Rating agency Moody’s Investors Service Inc. continues to hold a negative outlook on India’s banking system, fearing that high levels of corporate leverage will prevent any meaningful recovery in asset quality over the next 12-18 months.
“The negative outlook on the Indian banking system pertains mainly to the public-sector banks, which represent more than 70% of total banking-system assets,” said Gene Fang, a Moody’s vice president and senior credit officer, in a report on the outlook of the banking system on Wednesday.
According to Moody’s, poor asset quality and low capitalization will remain the primary concerns for Indian public sector banks, which is not expected to improve much in the next 18 months.
Adjusting for old bad debts getting upgraded as standard loans, on a net basis, new bad loan accretion may have peaked, said Moody’s, but “restructured loans could increase in the next six months ahead of tighter restrictions on restructuring scheduled for implementation in April 2015,” Moody’s said in its banking sector outlook report.
After 1 April, whatever restructuring a bank does, will straightaway be considered as a bad debt and attract higher provision. This is pushing banks to restructure loans where stress is getting visible even if these loans may not require restructuring immediately, bankers and analysts say.
Moody’s added that public sector banks have seen a sharper uptick in non performing and restructured loans compared to private sector banks. This has led to greater weakening in profits, the rating agency said.
Profitability of banks will remain under pressure as banks continue to set aside more provisions for their stressed loans.
“This is particularly problematic for public-sector banks, which have lower pre-provision margins and greater asset quality problems,” Moody’s said in its report.
“Going forward, India’s corporate sector will remain highly levered, representing an obstacle to a cyclical recovery in asset quality,” said Fang.
According to Moody’s, India’s broad corporate sector is highly leveraged, with a debt-to-equity ratio of more than 3.0x. In particular, corporate entities engaged in infrastructure projects face both structural and cyclical challenges.
Any significant deleveraging would only take place when economic growth picks up. Moody’s expects the Indian economy to grow at 5% if fiscal 2015 and 5.6% in fiscal 2016.
“Without a stronger economic recovery, significant deleveraging will only occur beyond the horizon of this outlook,” said the rating agency.
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