Asset quality of Indian banks likely to remain under pressure: Moody’s

10 Jan 2017 Evaluate

The global credit rating agency, Moody’s Investors Service and its Indian arm ICRA in its joint report has said that the asset quality of Indian banks is likely to remain under pressure and will impact their credit profile over the medium term despite continued deterioration of the asset quality having been arrested by most of the lenders. The report said that asset quality will remain a negative driver of the credit profiles of most rated banks in the country and the stock of impaired loans. Non-performing loans and standard restructured loans will still rise during the horizon of their outlook that lasts till the next financial year.

According to Moody's, such pressure on asset quality largely reflects the system's legacy problems, as the banking sector had witnessed strong credit growth in 2009-2012 when the investment plans of Indian corporates rose significantly. While corporate balance sheets would remain weak, the rating agency believes that a further deterioration in key credit metrics such as debt/equity and interest coverage ratios has been arrested. The report said that the pace of asset quality deterioration over the next 12-18 months should be lower than what was seen over the last five years, and especially compared to the financial year 2015-16. It considers the Reserve Bank of India’s (RBI’s) asset quality review in December 2015 as an important catalyst in pushing banks to recognise some large accounts as being impaired. Now it estimates the true level of impaired loans for Indian banks to be around 1-1.5 percentage points higher than the latest reported numbers.

Further, the latest Financial Stability Report by the RBI had said the gross non-performing advances ratio increased to 9.1 per cent from 7.8 per cent between March and September 2016, pushing the overall stressed advances ratio to 12.3 per cent from 11.5 per cent. Moody's said given the magnitude of stressed assets in the system, it expects the banks to increase their focus on resolving some of the large problem accounts. ICRA said that weak demand for credit, increasing competition and greater dis-intermediation will continue to exert downward pressure on lending rates. It said the overall capitalisation levels of most of the public sector banks remain moderate to weak, given that they need to attain the regulatory minimum tier-I requirement of 9.5 per cent by March 2019. The current plan of infusing Rs 45,000 crore during 2016-17 and 2018-19, of which Rs 16,414 crore have already been infused in the current year, is below its estimate of capital requirements of Rs 1,50,000-1,80,000 crore.

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Asset quality of Indian banks likely to remain under pressure: Moody’s

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