Credit rating agency, Moody’s Investor Service has said that the asset quality of state owned banks would continue to be burdened by weak financial health of Indian corporates. It highlighted that asset quality of public sector bank had hit the bottom and that its recovery would take some time. The agency also added that non-performing assets of banks would continue to be a drag on bank’s credit quality.
However, Moody’s stated that it expects lower formation of net new performing loan for public sector banks than those observed over last three years, while estimating impaired loan ratio to stabilize around the current levels.
Although, the agency expects the formation of new net performing loans to gradually decrease over next two years, it pointed that health of corporates in India, despite stabilizing, continues to remain fragile on an absolute basis with high debt levels and weak debt-servicing metrics. It noted that this would have a negative impact on public sector banks, which have a higher share of corporate loans in their loans books than private banks.
Moody’s further emphasized that despite the favorable market condition, it would at least take 2-3 years for a meaningful reduction in leverage due to the high debt levels, owing to which the PSU banks would continue to have a high level of credit, which in turn will constrain their internal capital generation and make them dependent on external capital infusion to increase their low capital levels.
