Global ratings firm Moody's on Wednesday downgraded the outlook of the Indian banking system to "negative" from "stable" amid an economic slowdown, which is affecting asset quality, capitalisation and profitability.
"With asset quality, given the tightening environment, we anticipate that it will deteriorate over the next 12-18 months, thereby causing an increase in provisioning needs for the banks in FY2012 and FY2013," Moody's Vice-President and Senior Analyst Vineet Gupta said.
A "negative" outlook is one that is characterised by volatility and uncertain conditions, according to Moody's.
READ: Moody's downgrades State Bank of India On the positive side, however, the rating firm has recognised that India banks' stable customer deposit base and their high level of government securities holdings provides them with a "resilient funding and liquidity profile" that buffers them against destabilising shocks.
India's economic growth has averaged 8.4 per cent over the past five years. But amid high inflation, monetary tightening and rapidly rising interest rates, the sustenance of the growth momentum is under pressure.
Stating that India's economic momentum is slowing, Gupta said, "At the same time, concerns have emerged over the sustainability of the recovery in the US and Europe and the rise in the borrowing programme of the Indian government, which could drain funds away from the private credit market."
Loan growth would be a "strain" on the Indian banking system in the next 12-18 months, while profitability will come under pressure due to lower interest margins and an increase in saving deposit rates, the report said.
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