Moody’s Investors Service report on banks

According to a report released by Moody’s Investors Service, India’s banking system is moving past the worst of its asset quality slump.

• This outlook is based on the company’s analysis of five key factors—operating environment, asset risk and capital (stable), funding and liquidity, profitability and government support.

Highlights of the report:

• According to the report, 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.
• While the operating environment for Indian banks is supported by a stabilising economy, the asset quality indicator still remains a problem but the picture is getting better on account, according to the report.
• However, asset quality will remain a negative driver of the credit profiles of most rated Indian banks. But, the pace of deterioration in asset quality over the next 12-18 months should be lower than what was seen over the last five years.
• 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.

Moody’s baseline scenario assumes headline GDP growth of 7.4 per cent over the next two years compared with 7.3 per cent in 2015, with key drivers being a favourable monsoon season, ongoing public investment, and continued growth in foreign direct investment.