Moody’s outlook on Indian banks continues to be negative

Moody’s outlook on Indian banks continues to be negative

Slow growth, high interest rates and inflation remain a challenge for banks, says Moody’s

Mumbai: Moody’s Investors Service’s outlook on the Indian banking system continues to be negative against a backdrop of slow economic growth, high inflation, high interest rates, and a weak local currency.

Moody’s, which had lowered its outlook on Indian lenders to negative from stable in November 2011, said on Tuesday that its view for the next 12-18 months remained negative as it expects “these factors to lead to a further deterioration in asset quality, an increase in provisioning costs, and a fall in profitability.”

September-quarter results showed that the asset quality of several state-owned lenders was deteriorating as the combination of a slowing economy with high inflation and interest rates made it difficult for many corporate and industrial borrowers to service their loans.

“We view the loan classification (more particularly with regards to restructured loans) and provisioning practices in India as weak and we believe they mask the extent of the banks’ asset quality and capital challenges,” Vineet Gupta, vice-president senior analyst, and Jean-Francois Tremblay, associate managing director, financial institutions group, of Moody’s Investors Service Singapore Pte Ltd, said in their report, released in Singapore on Tuesday.

On the positive side, they said the Indian banking system is stable with strong business franchises that support low-cost funding and help banks maintain sizable lending margins to sustain earnings.

At 11.30am, the Bankex, the banking sector index of the BSE, was up 0.5% even as the benchmark Sensex gained 0.13%.