Moody's upgrades banking system outlook to 'stable'; economic recovery likely to drive credit growth

Moody's Investors Service on Tuesday raised the outlook for the Indian banking system to 'stable' from 'negative' citing moderate deterioration of asset quality since the onset of the pandemic and likely pick-up in credit growth with economic recovery.

Moody's expects India's economy to continue to recover in the next 12-18 months, with GDP growing 9.3 per cent in the fiscal year ending March 2022 and 7.9 per cent in the following year.

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"The pick-up in economic activity will drive credit growth, which we expect to be 10-13 per cent annually. Weak corporate financials and funding constraints at finance companies have been key negative factors for banks but these risks have receded," Moody's said in its 'Banking system outlook - India' report.

The quality of corporate loans has improved, indicating that banks have recognized 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 have revised the outlook for the Indian banking system to stable from negative. The deterioration of asset quality since the onset of the coronavirus pandemic has been moderate, and an improving operating environment will support asset quality. Declining credit costs as a result of improving asset quality will lead to improvements in profitability," Moody's said.

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

Earlier this month, Moody's had raised India's sovereign rating outlook to 'stable' from 'negative'. It also affirmed sovereign rating at 'Baa3'.