Outlook for banking system remains negative: Moody's

MUMBAI Tue Dec 4, 2012 2:02pm IST

1 of 2. Kashmiri people perform transactions at a bank in Srinagar August 19, 2008.

Credit: Reuters/Fayaz Kabli/Files

Related Topics

MUMBAI (Reuters) - Moody's said its outlook on the Indian banking system over the next 12 months to 18 months remains negative due to a challenging operating environment which is likely to pressure banks' profits.

"This environment is characterized by slow economic growth, high inflation, high interest rates, and a weak local currency," Vineet Gupta, a Moody's vice president and senior analyst said in a statement released on Tuesday.

"We expect these factors to lead to a further deterioration in asset quality, an increase in provisioning costs, and a fall in profitability," he added.

The Indian economy grew by 5.3 percent in the September quarter and is on track for its slowest growth in a decade for the fiscal year that ends in March.

Moody's expects the high level of loan growth, at about 15 percent annually, to continue outstripping internal capital generation, posing a challenge for Indian banks to maintain capitalization at current levels, with some banks facing a need to raise new capital externally. It was not immediately clear what precisely the agency was referring to as external capital.

The ratings agency also said loan classification, especially regarding restructured loans, as well as provisioning requirement practices in India is weak.

"Loan classification and provisioning requirements mask the extent of the banks' asset quality and capital challenges," Gupta said.

Moody's, however, continues to assume a high probability of systemic support by the government which has already announced its plans for capital infusions into some state-run banks.

The government will decide in the next few weeks how much additional capital will be injected into state banks after determining most such lenders will need additional funds, Finance Minister P. Chidambaram said in mid-November.

However, the combined injection of capital will not exceed the 150 billion rupees provided in the budget for the fiscal year ending in March 2013, Chidambaram added.

Banking shares rose on Monday after TV channels reported the government will take a decision on capital infusion this week.

The banking index was up 0.13 percent on Tuesday, roughly in line with the broader market.

"If needed, Moody's believes that the government would provide extraordinary support in the form of unsecured loans and/or capital injections to both the public and the rated private banks," it said in the report.

(Reporting by Swati Bhat; Editing by Muralikumar Anantharaman)

FILED UNDER:
  • Most Popular
  • Most Shared

REUTERS SHOWCASE

Tobacco Control

Tobacco Control

India moves toward ban on loose cigarettes to deter smoking   Full Article 

Modi at SAARC

Modi at SAARC

Modi gives Buddha a miss as SAARC leaders flock to Nepal.  Full Article 

Reuters Insight

Reuters Insight

In Modi’s India, green shoots of reform from Rajasthan.  Full Article 

Investing in ETFs

Investing in ETFs

U.S. investors elevate India over other emerging markets  Full Article 

J&K Elections

J&K Elections

Kashmiris turn out to vote as BJP bids for power  Full Article 

Trade Talks

Trade Talks

India, U.S. hold first trade dialogue in four years  Full Article 

Modi's Wife

Modi's Wife

Modi's estranged wife unhappy over round-the-clock security  Full Article 

Global Economy

Global Economy

OECD sees gradual world recovery, urges ECB to do more  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage