New Delhi/Singapore, Moody’s Investors Service’s outlook expects that real GDP in India will grow 7.2 per cent in the year ending March 2019 and 7.4 per cent in the following year, driven by investment growth and strong consumption.
Moody’s Investors Service’s outlook for the banking system in India over the next 12-18 months is stable underpinned by healthy economic growth, and weak but stabilising asset quality.
“Our outlook for the Indian banking system is stable, underpinned by healthy economic growth, and weak but stabilizing asset quality,” said Moody’s Vice President and Senior Credit Officer Srikanth Vadlamani.
The stable outlook is based on Moody’s assessment of six drivers — operating environment; asset quality, capital; funding and liquidity; profitability and efficiency; and government support– all of which Moody’s assesses at stable.
Moody’s conclusions are contained in its just-released report on Indian banks titled “Economic strength and stabilised asset quality support stable outlook”.
With the operating environment, Moody’s says that the environment will stay stable, supported by robust economic growth.
However, liquidity constraints at non-bank finance institutions (NBFIs) — increasingly important providers of credit for the economy — will prove a drag on growth. Rising interest rates also represent a risk.
On asset quality, Moody’s says that this factor will remain stable but weak, as the clean-up of legacy problem loans nears completion and corporate health improves.
In particular, the banks have recognised the bulk of legacy problem loans and will start making recoveries from large resolved nonperforming loans (NPLs). This will help shore up asset quality, although the degree of success in the resolution of large NPLs will determine the extent of asset quality improvements.
As for capitalisation, public sector banks will continue to show weak capitalisation, and depend on government capital injections to meet minimum capital requirements.
The banks’ funding and liquidity will stay strong. Indian banks are largely deposit funded and their liquidity coverage ratios are all above 100 per cent. The funding and liquidity profiles of public sector banks, in particular, will remain resilient, despite their solvency challenges.
The banks’ profitability will improve but stay weak, because of high credit costs. Specifically, their net interest margins will widen marginally because of a reduction in NPLs and a strengthening of their pricing power, amid the situation in the debt capital markets, which make bank loans more attractive for corporate borrowers.
However, while credit costs at public sector banks have fallen, such costs will remain high and weigh on system wide profitability.
With government support, Moody’s says that government support for public sector banks will stay strong. Capital infusions over the past few years for all public sector banks facing capital shortfalls, as well as other government measures, provide strong support for Moody’s assumption of very strong government support for public sector banks.
Moody’s rates 16 banks in India, 15 commercial and one policy bank.The 15 commercial banks account for about 70 per cent of assets in the system. Of the 15, 11 are state-owned, with weaker standalone fundamentals than private sector banks.
The Indian policy bank that Moody’s rates is the Export-Import Bank of India, with ratings on par with that of the Government of India.