Moody’s affirms stable outlook for Indian banking system, says govt support for PSBs will stay strong

New Delhi: Global rating agency Moody's gave a stable (Baa2) outlook to India’s banking system, driven by the ongoing progress on asset quality front and better operating environment.

The stable outlook is based on Moody's assessment of six drivers, all of which Moody's assesses at stable. The six drivers are: operating environment; asset quality, capital; funding and liquidity; profitability and efficiency; and government support, the rating agency said in its report.

Moody's rates 16 banks in India, 15 commercial and one policy bank. The 15 banks rated by Moody’s in the country together 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 it’s annual Banking System Outlook on India, the agency said that the environment will stay stable, supported by robust economic growth. Moody's expects that real GDP in India will grow 7.2 percent in the year ending March 2019 and 7.4 percent  in the following year, driven by investment growth and strong consumption.

On asset quality, Moody's said that this factor will remain stable but weak, as the clean-up of legacy problem loans nears completion and corporate health improves.

“In particular, the banks have recognized the bulk of legacy problem loans and will start making recoveries from large resolved nonperforming loans (NPLs). This will help shore up asset quality, although the degree of success in the resolution of large NPLs will determine the extent of asset quality improvements,” the report said.

It said the government support for public sector banks will stay strong. Capital infusions over the past few years for all public sector banks facing capital shortfalls, as well as other government measures, provide strong support for Moody's assumption of very strong government support for public sector banks.  

“The banks' funding and liquidity will stay strong. Indian banks are largely deposit funded and their liquidity coverage ratios are all above 100%. The funding and liquidity profiles of public sector banks, in particular, will remain resilient, despite their solvency challenges,” the report added.