Mumbai: Moody's Investors Service today upgraded its outlook for the country's banking system to 'stable' from 'negative' on the expectation of reduction in pace of accretion of bad loans over the next few years helped by improvement in the operating environment.
The rating agency had a negative outlook on the banking system for four years, starting 2011, due to the asset quality trends.
"We do think the stock of non performing loans (NPLs) will keep going up, we are not saying that has bottomed out, but the pace of addition to NPLs will come down meaningfully over the next two years as compared to what it has been over the last four years," Moody's Vice President (Senior Credit Officer) Srikanth Vadlamani told reporters here today.
Moody's rates 15 banks in the country that together account for around 70 per cent of the system assets. While 11 of them are public sector banks, four are from private sector. He said the pace of bad loans will be reduced as the operating environment is getting better.
"The GDP growth has stabilised and so are the leading indicators of asset quality which point to some stability," he said.
Moody's expects the country will record GDP growth of around 7.5 per cent in 2015 and 2016. Recently, World Bank has also retained the country's GDP growth at 7.5 per cent for this fiscal.
"If you look at the investor sentiment, we think that it remains very positive and that is evident in the movement of currency that we have seen over the last two months," Srikanth added.
He said even in the last 2-3 years, the regulators, policy makers and banks have taken prudent measures, which are positive.
"On the policy front there has been lot of action as far as project approvals are concerned. Banks have also tightened their loan approvals," he said adding that the action has resulted in improvement in environment.
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Talking about the asset quality, the issue in public sector banks is of recognising existing problems rather than any new problems coming up.
"While we do still believe that there is an element of under-recognition, we believe that has come down quite significantly," he said.
He said the problem of under recognition of impaired loans also exists among some of the private sector players.
"Yes, in the specific sectors like power, especially, we think there is a significant level of under recognition among some of the private sector banks," he said.
The rating agency believes that although the government plans to infuse Rs 70,000 crore in public sector is credit positive, it is still short of the banks' overall capital requirements.
"We do still feel that PSU will have to access capital markets to really fulfil the overall capital requirements," Srikanth said.
He said the government's decision to selectively infuse capital in public sector banks is not a practical solution. "At the current juncture, it is difficult to attach too much weightage to banks' performance while allocating capital because if the weak banks are not given capital they will lead to systematic stability concerns," he said.
According to him, the government will not make any changes that could suggest the possibility of reduced support to or differentiated among the banks because doing so could entail significant systemic risks.
He said the Indradhanush programme is in the right direction, but he perceives corporate governance as a credit weakness for state-run banks.
"Our review remains that corporate governance at these banks is a credit weakness and while the recent government action is positive, we don't think we have seen enough for us to change that feeling," he said.
