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

Reforms Plan

REUTERS SHOWCASE

Border Talks

Border Talks

India names Ajit Doval as special envoy for China border talks.  Full Article 

WTO Deal

WTO Deal

U.S. seeks to step up India trade talks  Full Article 

Phone Masts

Phone Masts

American Tower to buy Bharti Nigeria phone masts for $1.1 billion  Full Article 

Infrastructure Plan

Infrastructure Plan

India targets private cash to build railways to its ports.  Full Article 

Shadow Banking

Shadow Banking

Reserve Bank planning more measures for NBFCs.  Full Article 

Auto Sector

Auto Sector

Hyundai Motor, Kia Motors lift 2014 global sales target on China, emerging markets  Full Article 

Oil Prices

Oil Prices

Some fund managers see oil falling to $60 without OPEC cut.  Full Article 

Project Shelved

Project Shelved

Jindal Steel shelves $10 bln project after coal setback.  Full Article 

Market Eye

Market Eye

Sensex, Nifty rise to record after China, ECB stimulus boosts risk appetite.  Full Article 

Reuters India Mobile

Reuters India Mobile

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