New Delhi: The pace of bad loan formation is going to be slower resulting in a stable outlook for the Indian banking sector over the next 12-18 months, Moody's Investors Service said Monday.
"While the stock of impaired loans may still increase during the horizon of this outlook, the pace of new impaired loan formation should be lower than what it has been over the last few years," Moody's VP and Senior Credit Officer Srikanth Vadlamani said.
India's banking system is moving past the worst of its asset quality down cycle, supporting its stable outlook for the sector over the next 12-18 months, it said in a report.
"The performance of India's state-owned and private banks continues to diverge," Vadlamani said.
"The state-owned banks will require significant capital over the next three years with limited access to the capital markets, while the private banks benefit from solid capitalisation and good profitability," he said.
Moody's outlook expresses its expectation of how bank creditworthiness will evolve in the system over the next 12-18 months.
The stable outlook is based on Moody's assessment of five drivers -- stable operating environment, asset risk and capital, funding and liquidity, profitability, and Government Support.
The operating environment for Indian banks is supported by a stabilising economy, it said.
Moody's baseline scenario assumes headline GDP growth of 7.4 percent over the next two years, compared with 7.3 percent in 2015, with key drivers being a favourable monsoon season, ongoing public investment, and continued growth in foreign direct investment.
Asset quality will remain a negative driver of the credit profiles of most rated Indian banks, but the pace of deterioration should slow.
Moody's said it expects limited policy rate cuts over the next 12 months, which should help stabilise Net Interest Margin (NIMs). Credit costs will remain high for the sector, but no higher than in recent years for the industry overall.
It also believes that state-owned banks will receive a very high level of systemic support, irrespective of their size.
Moody's said that besides legacy issues for some banks, the underlying asset trend will be stable because of the generally supportive operating environment.
"Capital levels remain a key credit weakness for state-owned banks, and the announced capital infusion plans of the government fall short of the amount required for their full capitalisation," it said.
However, a potential way to bridge this capital shortfall would be to slow loan growth to the low single digits over the next three years, it added.
Funding and liquidity remains a bright spot for the system, and will remain supported by Moody's expectation of relatively subdued loan growth during the outlook.
Profitability for the banks will reflect stabilising net interest margins (NIMs) and credit costs.
For private banks, systemic support will be determined by their systemic importance, and range from high to very high or Moody's rated universe.
Moody's rates 15 banks in India that together account for around 70 percent of system assets.
The ratings outlook on 11 of the banks is positive, reflecting the global rating agency's positive outlook on the sovereign rating and the high degree of government support that could be expected for the banks, if needed.