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 ($2.73 billion) 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.
Outlook for India's banking system remains negative: Moody's
Global rating agency Moody's today said its outlook on Indian banks remains negative as asset quality could further deteriorate, leading to decline in profitability due to slow economic growth and high interest rates.
Moody's Investors Service in a statement said, "its outlook on the Indian banking system for the next 12-18 months remains negative - as it has been since November 2011 - reflecting the continued challenging nature of its domestic operating environment".
Moody's rates a total of 15 public sector and private sector banks, which together accounted for about 66 per cent of the banking system's estimated total assets on March 2012.
The gross gross NPAs or bad loans of all public sector banks taken together has increased to 4.01 per cent in the second quarter of the fiscal from 3.06 per cent in the year ago period.
As per the agency, banks' average standalone credit strength is D+, or ba1 on the long-term rating scale, whereas their average foreign currency long-term deposit rating is Baa3, which is investment grade.
Moody's said India's environment is characterised by slow economic growth, high inflation, high interest rates, and a weak local currency.
"...we expect these factors to lead to a further deterioration in asset quality, an increase in provisioning costs, and a fall in profitability," said Vineet Gupta,
Moody's Vice President and Senior Analyst.
Moody's also expects the high level of loan growth, at about 15 per cent annually, to outstrip internal capital generation.
"...then most of the Moody's- rated Indian banks will bechallenged to maintain capitalisation levels at current levels, and some will even need to raise new capital
externally," Gupta added.
However, on the positive side, one anchor of stability for Indian banks is their strong business franchises. he said.
The agency also "continues to assume" a relatively high probability of systemic support, as the government already provides annual equity infusions for public sector banks.
"This implies a high degree of involvement by the government in the banking sector and related public accountability," it said.
Moody's believes that the government would provide extraordinary support in the form of unsecured loans and capital injections to both the public and rated private banks.
The government will decide on Rs 15,000 crore capital infusion in public sector banks to shore up their capital base this week.
India's economic growth slipped to a near decade low level during the second quarter of this fiscal amid high interest rates and inflation.