Moody’s improves outlook for Indian banking system

Moody’s Investors Service has revised the outlook for India’s banking system to “negative” from “stable” due to stabilizing asset quality and improving capital raising.

The global credit rating agency, in its outlook for the Indian banking system, observed that the deterioration in asset quality since the onset of the coronavirus pandemic has been moderate and that an improving operating environment will support asset quality. assets.

Moody’s raises India’s rating outlook from ‘stable’ to ‘negative’

Lower credit costs resulting from improved asset quality will lead to improved profitability. The agency estimated that capital will remain above pre-pandemic levels.

Moody’s expects India’s economy to continue to recover over the next 12 to 18 months, with GDP growing at 9.3% in the fiscal year ending March 2022 and at 7.9 % the next year.

The agency estimated that the pick-up in economic activity will boost credit growth, which it expects to be 10-13% a year. Weak corporate finances and funding constraints for financial companies were the main negative factors for banks, but these risks have subsided.

Asset quality will be stable

According to Moody’s, the deterioration in asset quality since the start of the pandemic has been more subdued than expected despite relatively limited regulatory support for borrowers.

The agency noted that the quality of business loans has improved, indicating that banks have recognized and provisioned all old problem loans in this segment.

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“The quality of retail lending has deteriorated, but to a limited extent as there have been no large-scale job losses. We expect asset quality to improve further, leading to lower credit costs, as economic activity normalizes,” Moody’s said.

Equity fundraising

Capital ratios rose at rated banks over the past year as most issued new shares, according to the agency.

Moody’s said the ability of public sector banks to raise capital in the market is particularly positive in terms of credit, as it reduces their reliance on the government for capital.

However, further capital increases will be limited as banks will use most retained earnings to support an acceleration in loan growth, according to the agency.

The agency estimated that banks’ asset returns will rise as credit costs decline while banks’ core profitability will be stable.

If interest rates rise, net interest margins will rise, but it will also lead to market value losses on banks’ large holdings of government securities, he said.

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