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

A statue of Ganesh, the deity of prosperity, is carried in a taxi to a place of worship on the first day of the ten-day-long Ganesh Chaturthi festival in Mumbai August 29, 2014. REUTERS/Danish Siddiqui

Ganesh Chaturthi Festival

During Ganesh Chaturthi idols will be taken through the streets in a procession accompanied by dancing and singing, and will be immersed in a river or the sea in accordance with Hindu faith.  Slideshow 

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:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

Market Eye

REUTERS SHOWCASE

Coal Block Allocation

Coal Block Allocation

Government urges Supreme Court to not cancel some 'illegal' coal mines  Full Article 

Modi in Japan

Modi in Japan

Japan and India agree to boost strategic ties at summit  Full Article 

HSBC PMI

HSBC PMI

Factory activity expands at slower clip in August.  Full Article 

Market Outlook

Market Outlook

Indian shares headed for correction, but outlook strong - BofA Merrill.  Full Article 

India Infrastructure

India Infrastructure

RBI rule handicaps India's infrastructure hopes  Full Article 

Book Talk

Book Talk

Reema Abbasi and a glimpse of Pakistan’s Hindu past  Full Article 

China Economy

China Economy

Retreat in China's PMIs heightens calls for policy easing.  Full Article 

Reuters India Mobile

Reuters India Mobile

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