Moody's cuts Indian banking sector outlook

Posted on    10 November 2011

Global rating agency Moody’s Investors Service on Wednesday downgraded the outlook on India’s Rs64 trillion banking sector to negative from stable, saying a slowing domestic economy and chaos in global markets could lead to more bad loans, impact banks’ ability to raise money and profitability, but bankers, a domestic rater as well as the government uniformly dubbed the action “unwarranted” and “uncalled for” as the banking system is adequately capitalized and strongly regulated.

“India’s economic momentum is slowing because of high inflation, monetary tightening, and rapidly rising interest rates,” Vineet Gupta, a Moody’s vice-president and senior analyst, said. “At the same time, concerns have emerged over the sustainability of the recovery in the US and Europe, and the rise in the borrowing programme of the Indian government, which could drain funds away from the private credit market.”While a stable outlook implies an environment that favours sustainable growth and limited volatility, a negative outlook signals volatility and uncertain conditions.


Moody’s, however, noted that a strong deposit base of Indian lenders and the government’s commitment to support state-run and private banks could act as positive factors for the system.


The announcement was made in Singapore, in the early hours of trading in Indian markets. The Bankex, BSE’s banking index, dropped 2.62% on Wednesday to close at 11,020.96 even as the benchmark equity index, the Sensex, lost 1.18%. Since January, the Bankex has lost 17.82% against a 15.45% fall in the Sensex.

Moody’s may have downgraded the outlook for India’s banking sector, butMint’s Tamal Bandyopadhyay says there’s nothing to be alarmed about.


Brushing aside the downgrade, the government said the rating has no significance as domestic lenders are much stronger than their global peers. “We’re not concerned. We’re not affected by the downgrade. Looking at how global banks are faring, we’re much stronger and the ratings have no significance,” financial services secretary D.K. Mittal said.


The Reserve Bank of India’s (RBI) Financial Stability Report in June indicated that the Indian financial system remained stable “in the face of some fragilities being observed in the global macrofinancial environment”.


A series of stress tests in respect of credit, liquidity and interest rate risks showed that banks remained reasonably resilient, though their profitability could be affected significantly.


Deepak Parekh, chairman of India’s oldest mortgage lender Housing Development Finance Corp. Ltd, too, said India’s banking system is healthy and banks are adequately capitalized.


“I don’t think India’s banking system is at risk. It is safe and robust. Infrastructure and power finance is an issue, but I disagree that there is a need to downgrade Indian banks,” he said.


“Banks in India have adequate provisions and are making profits. Power (sector) exposure is high, but I don’t think power projects will become bad debts. There is a need to increase power tariffs,” Parekh added.


State Bank of India (SBI) chairman Pratip Chaudhuri said: “We should not take the downgrade seriously. You know how rating agencies work. In case something bad happens, they will come and say, ‘See, I told you so’.”


Moody’s had downgraded India’s largest lender SBI in October, citing “modest capital and weakening asset quality”. It lowered SBI’s financial strength, or stand-alone rating, to D+ from C-, pushing its stock to a two-year low.


“I do not think the situation warrants a downgrade,” said K.R. Kamath, chairman and managing director of Punjab National Bank. “The government has very clearly assured us that capital needs of state-run banks will be met.”


Moody’s action could, however, impact the fund-raising plans of Indian banks abroad, and the cost of borrowing may go up, experts said. Kamath said pricing of overseas loans largely depends on the ratings. SBI plans to borrow overseas to expand its loan book in foreign markets.


Rajesh Mokashi, deputy managing director at Credit Analysis and Research Ltd (CARE), said a large part of the banking system is owned by the government and “it does not warrant a review at this stage”.


State-run banks control around 75% of the banking system in terms of assets. Moody’s has rated 15 commercial banks in India, which together account for about 66% of the total assets of the system as on March 2011, the agency said.


Interestingly, Moody’s negative outlook on the banking system is in contrast with its own stable outlook assigned to the bank financial strength ratings of 14 of the 15 banks it rated.


Moody’s warned that the ratings of weaker Indian banks will come under pressure.


Rising non-performing assets (NPAs) have been a worry for the Indian banking sector in the past one year, mainly from repeated restructuring of loans given to companies in the real estate, aviation, microfinance and power businesses. Indian banks saw the highest growth in their bad loans in five years in the April-June quarter, when their gross NPAs (bad loans) rose by 7.64%—from Rs60,685 crore in the January-March quarter to Rs65,318 crore. Since then the situation has deteriorated further.


In the wake of the global financial meltdown, the banks restructured at least 5% of their loans across sectors. At least 10-15% of these restructured loans have turned bad for most lenders, according to data from CARE.


Moody’s said the loan growth of Indian banks over the next 12-18 months is also likely to slow due to poor capital conditions.


“...we expect loan growth to be a strain on the banks’ capital over the horizon of this outlook. As monetary conditions tighten and economic activities slow, we expect bank loan growth to fall to 16-18% in FY2012 and FY2013, from 21% in FY2011.” This is in sync with RBI’s projection for the current fiscal.


The government, which is struggling to meet adequate funds for its planned expenditure, recently increased the size of its second half market borrowing programme by 32%, but has reiterated that it would infuse adequate capital into state-run banks.


Naresh Takkar, managing director and chief executive officer of Icra Ltd, in which Moody’s is the single largest shareholder, justified the downgrade, saying that it reflects the worsening environment for banks.


“The rating action reflects deterioration in the operating environment and concerns relating to Indian banks’ asset quality in sectors like power, infrastructure and small and medium enterprises. The rating action reflects these pressure points which are getting built up,” he said.

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