Moody’s Investors Service has revised the outlook for the Indian banking system from stable to negative. Moody’s expects India’s economy to continue to recover over the next 12-18 months, with GDP growth of 9.3% in the fiscal year ending March 2022 and 7.9% % the next year. The pick-up in economic activity is expected to boost credit growth, which Moody’s predicts at 10-13% annually.
“Weak corporate finances and funding constraints for finance companies have been key negative factors for banks, but these risks have diminished,” he said.
In a report titled “Banking System Outlook – India: Stabilizing Asset Quality and Improving Prospects for Capital Growth to Stable,” Moody’s said: “The deterioration in asset quality since the start of the pandemic of coronavirus has been moderate and an improvement in the operating environment will support the quality of assets. Lower credit costs resulting from improved asset quality will lead to improved profitability. The capital will remain above pre-pandemic levels “.
The deterioration in asset quality since the start of the pandemic has been more moderate than expected despite relatively limited regulatory support for borrowers, Moody’s said, adding that “the quality of business loans has improved, indicating that banks have recognized and provisioned all legacy issues. loans in this segment.
However, the quality of personal loans, according to the rating agency, has deteriorated, “but to a limited extent because there have been no large-scale job losses.”
Moody’s expects asset quality to improve further, leading to lower credit costs, as economic activity normalizes.
In the report, according to Moody’s, capital ratios have increased at all of the rated banks over the past year, as most have issued new shares.
“The ability of public sector banks to raise equity in the market is particularly conducive to credit because it reduces their dependence on government for capital. However, further capital increases will be limited as banks will use most of the retained earnings to support an acceleration in loan growth, ”he said.
In addition, the returns on assets of banks will rise as the costs of credit fall while the core profitability of banks is stable, he said.
“If interest rates rise, net interest margins will rise, but it will also cause mark-to-market losses on banks’ large holdings of government securities.”
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