Moody's Investors Service on Tuesday revised the outlook for the Indian banking system to 'stable' from 'negative' on stabilising asset quality and improved capital drive.
The deterioration of asset quality since the onset of the coronavirus pandemic has been moderate, and an improving operating environment will support asset quality, the rating agency said in a release.
Declining credit costs due to improving asset quality will lead to improvements in profitability, while capital will remain above pre-pandemic levels, it added.
"We expect 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. The pickup in economic activity will drive credit growth, which we expect to be 10 per cent-13 per cent annually," Moody's said.
While weak corporate financials and funding constraints at finance companies have been the key negative factors for banks, these risks have receded, the agency said.
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On asset quality, Moody's said the deterioration since the onset of the pandemic has been more moderate than its expectations despite relatively limited regulatory support for borrowers.
"The quality of corporate loans has improved, indicating that banks have recognised 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," it said, adding that it expects asset quality to improve further as economic activity normalises.
Besides, capital ratios have risen across the banks rated by it in the past year as most have issued new shares, the ratings agency said. The ability of public sector banks to raise equity capital from the market is particularly credit positive as it reduces their dependence on the government for capital, it said.
"However, further increases in capital will be limited because banks will use most of retained earnings to support an acceleration of loan growth."
Moody's sees banks' profitability improving as loan-loss provisions decline, and funding and liquidity remain stable. Besides, it also expects the government to provide a very "high level" of support for rated public sector banks, given their strong links to the government.
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