American Bond credit rating company Moody's has revised the outlook for the Indian banking system to stable from negative. Moody's expects India's economy to continue to recover in the next 12-18 months, with GDP growing 9.3% in the fiscal year ending March 2022 and 7.9% in the following year.
Suggesting that the deterioration of asset quality since the onset of the coronavirus pandemic has been moderate and an improving operating environment will support asset quality, Moody decided to revise ratings for Indian banking system.
The basis of Moody's revision of outlook for the Indian banking system has been the limited impact that the pandemic has on the deterioration of asset quality of banks despite relatively limited regulatory support for borrowers.
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"The pickup in economic activity will drive credit growth, which we expect to be 10-13 per cent annually. Moreover, weak corporate financials and funding constraints at finance companies have been key negative factors for banks but these risks have receded," it said.
The quality of corporate loans has improved, indicating that banks have recognised and provisioned for all legacy problem loans in this segment. The quality of retail loans has deteriorated, but to a limited degree because large-scale job losses have not occurred.
"We expect asset quality will further improve, leading to decline in credit costs, as economic activity normalises," Moody's banking system outlook said.
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The ratings agency said that capital ratios have risen across rated banks in the past year because most have issued new shares. Public sector banks' ability to raise equity capital from the market is particularly credit positive because it reduces their dependence on the government for capital. However, further increase in capital will be limited because banks will use most of retained earnings to support an acceleration of loan growth.
