Indian Banks asset quality improving, but liquidity and rising interest rates are a drag says Moody's

Last Updated: Mon, Dec 03, 2018 12:57 hrs
A labourer works on the sign of a bank building in the western Indian city of Ahmedabad

The outlook and growth prospects for Indian Banks is stable. In fact, the coming 12-18 months, the growth prospects remain healthy inspite of weak yet stabilising asset quality. Investor information service agency Moody's said that their outlook on Indian banks was stable.

This outlook was based primarily on six parameters such as operating environment, asset quality, capital, funding and liquidity, profitability and efficiency, and government support.

Moody's rates 15 commercial banks in India, which account for about 70 percent of assets in the system. Of the 15, 11 are state-owned, with weaker standalone fundamentals than private sector banks.

In a statement, the agency added that this environment was likely to remain stable aided by robust economic growth. Real GDP in India is expected to 7.2% for the year ending March 2019 and 7.4 percent in the next year, fueled by investment growth and strong consumption.

However for all the optimism, the agency also suggests a major risk- liquidity constraints at non-bank finance institutions, increasingly important providers of credit for the economy, could prove a drag on growth. Rising interest rates also represent a risk, Moody's said.

On asset quality, Moody's said it will remain stable but weak, as the clean-up of legacy 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 non-performing loans that have been resolved. "This will help shore up asset quality, although the degree of success in the resolution of large NPLs [Non-performing loans] will determine the extent of asset quality improvements," the rating agency said.

As for capitalisation, public sector banks will continue to show weak capitalisation, and depend on government capital injections to meet minimum capital requirements.

"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," Moody's said, adding Government support for public sector banks will stay strong.