Moody’s has changed its outlook for India’s banking system to stable from negative because of the gradual improvement in the operating environment for Indian banks.
“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 problem loans, leading to more stable impaired loan ratios,” says Srikanth Vadlamani, a Moody’s Vice President and Senior Credit Officer.
Vadlamani points out that deteriorating asset quality was the key driver of Moody’s negative outlook on India’s banking system since November 2011.
“However, the recovery in asset quality will be U-shaped rather than V-shaped, because corporate balance sheets remain highly leveraged,” adds Vadlamani.
Moody’s conclusions were contained in its just-released report on India’s banks, entitled, “Banking System Outlook — India: Gradual Improvement in Operating Environment Drives Stable Outlook,” and is authored by Vadlamani.
The stable outlook is based on Moody’s assessment of five drivers: Operating Environment (improving); Asset Risk and Capital (stable); Funding and Liquidity (stable); Profitability and Efficiency (stable); and Government Support (stable).
Moody’s expects that India will record GDP growth of around 7.5% in 2015 and 2016. Growth has been supported by low inflation and the gradual implementation of structural reforms.