Moody’s upgrades banking system outlook

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Moody’s Investors Service on October 19 raised the outlook to stable from negative for the Indian banking system, owing to moderate deterioration of asset quality since the onset of the pandemic and likely pick-up in credit growth with economic recovery. The ratings agency expects the country’s economy to recover further in the next 12-18 months, with the GDP growing at 9.3% in the fiscal year ending March 2022 and 7.9% in the following year.

Quality of corporate loans improved

In its report titled Banking system outlook – India, said that the pick-up in economic activity will drive credit growth, which is expected to be at 10 to 13% annually. Key negative factors like weak corporate financials and funding constraints at finance companies which have been the risks for banks have receded.

In this segment, the quality of corporate loans has improved which indicates that the banks have recognised and provisioned for all legacy problem loans. On the other hand, the quality of retail loans has deteriorated, but to a limited degree because large-scale job losses have not occurred.

Moody’s said that an improving operating environment will support asset quality, while declining credit costs as a result of improving asset quality will lead to improvements in profitability.

The rating agency with strong links to the government, assumes that it will provide a very high level of support for rated public sector banks.

Moody’s had raised India’s sovereign rating outlook to stable from negative earlier this month. It also affirmed sovereign rate at Baa3.