The outlook for the Indian banking industry, which was until recently on a collision course due to high bad loans, is stable for the next 12-18 months, according to Moody’s Investors Services. “While the banks’ operating environment will stay stable, the economic slowdown in India will pose challenges to the banks’ asset quality,” said Alka Anbarasu, VP and senior credit officer, Moody’s.
According to the global ratings agency, economic growth over the next 12-18 months will remain weaker than previous years, at a time when banks are recovering from legacy non-performing assets (NPAs). In addition, despite stability in the country’s macro fundamentals, stress among non-banking financial companies (NBFCs) will continue to constrain economic growth.
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“The formation of new non-performing loans in the non-financial corporate segment will slow, helped by the improved financial health of corporates and recoveries from legacy problem loans,” she said adding, “However, stress at the NBFCs is a risk to the banks’ asset quality because the banks have large exposures to the sector.” Moreover, the economic slowdown could lead to creation for fresh bad loans within retail and small medium enterprise segment.
Meanwhile, capital infusion from the government will help public sector banks maintain their capital ratios at current levels. As for private banks, some are in the process of raising capital from equity markets, as their asset growth outstrips internal capital generation. Systemwide profitability will improve but stay weak, and funding and liquidity will remain stable, it noted. As for interest rates, lower rates will likely lend some support to growth.
Also, gradual declines in interest rates will provide some boost to the economic growth. Though, the Reserve Bank of India reduced repo rate by 75 bps to 5.75 since January 2019, banks are yet to fully transmit the reduction to customers.
Asset quality remains a key credit weakness for public sector banks, though it improved across the system in the past year as a result of lower slippages and recoveries from large resolved accounts and the acceleration of write-offs enabled by improved provisioning coverage.
“We expect the asset-weighted average NPA ratio for rated public sector banks to fall to about 9 per cent in the next 12-18 months from 11.5 per cent as on March 2019 and 14.3 per cent a year earlier,” Moody’s noted.
Similarly, the average NPA ratio for rated private sector banks fell to 3.9 per cent as on March 2019 from 4.6 per cent a year earlier, led by declines at corporate-focused private sector banks, such as ICICI Bank, and Axis Bank, it added.
Corporate slippages will likely to moderate, because most legacy problems loans to large corporate groups have been recognised as NPAs and also because corporate balance sheets continue to show signs of improvement amid deleveraging efforts that have been underway over the past few years.
Lastly, both banks and NBFCs have been aggressively increasing retail lending, at an annual rate of over 20 per cent in the past two years and delinquencies are already increasing in the home loans and other segments, which have been the subject of the stiffest competition among banks and NBFCs.