Asset quality and profitability of banks in India and ASEAN economies will deteriorate, says Moody’s

“The extent of loan deterioration will depend on the pace of economic recovery, efficiency of government support packages and regulatory forbearance, “ Moody’s said.

The asset quality and profitability of banks in India and Association of Southeast Asian Nations (ASEAN) countries will weaken as economic challenges grow, according to rating agency Moody’s. The net interest income (NII) of banks will decrease due to margin contraction, while credit costs will rise due to weaker asset quality, it stated.

The rating agency had earlier downgraded India’s sovereign credit rating by one notch to ‘Baa3’. The gross domestic product (GDP) of most ASEAN economies and India will contract in 2020, and gradually recover in the second half of 2021, Moody’s stressed. However, it also maintained that majority of banks are adequately capitalised and liquid, while expecting that the same would continue in 2020-2021.

The agency also said Singapore, Malaysia and the Philippines currently had the best asset quality, with non-performing loan (NPL) ratios of less than 2%.The Reserve Bank of India (RBI) governor on Saturday said that gross non-performing assets (NPAs) ratio of Indian banks remained at 8.3% till March 2020.

“The extent of loan deterioration will depend on the pace of economic recovery, efficiency of government support packages and regulatory forbearance, “ Moody’s said.

The recognition of problem borrowers is likely to accelerate in 2021 as loan payment moratoriums are lifted, it further said. According to Moody’s, while India has provided moratorium to 50% of borrowers, Malaysia has given repayment relief to 80%. The RBI had extended moratorium relief to borrowers for six months from March 1.

According to Moody’s, the share of negative outlooks and reviews had increased in 2019 and 2020 for banks in ASEAN countries and India. The percentage of negative bias has increased to 19% in 2019 from just 3% in 2018, it said. The percentage of negative bias by the rating agency has further increased to 31% till June. Moody’s had earlier downgraded HDFC Bank and State Bank of India’s (SBI’s) long-term local and foreign currency deposit ratings to Baa3, as it announced rating action on 11 Indian banks.