Moody Upgrades Banking Sector Outlook

Moody’s today upgraded its outlook for India’s banking system to ‘stable’ from ‘negative’. Moody’s rates 15 banks in India that together account for around 70 per cent of system assets. Four are private-sector banks and the remaining 11 are PSU banks.

In the report titled ‘Banking System Outlook – India: Gradual Improvement in Operating Environment Drives Stable Outlook‘, Moody’s said the stable outlook is based on Moody’s assessment of five drivers — improving operating environment, stable asset risk and capital, stable funding and liquidity.

Moody’s had assigned a negative outlook to the Indian banking system in November 2011 as it was of the view that the asset quality of the lenders was deteriorating.

The stable outlook on India’s banking system over the next 12-18 months reflects our expectation that the banks’ gradually improving operating environment will result in a slower pace of additions to loans problem, leading to more stable impaired loan ratios.

Also stable profitability and efficiency and the government support has supported a stable outlook for the sector, it said adding the recovery in the asset quality would be U-shaped rather than V-shaped, because corporate balance sheets remain highly leveraged.

On the operating environment, Moody’s expects that India will record the GDP growth of around 7.5 per cent in 2015 and 2016.