Moody’s Investors Service stated that the Indian banking system is “stable”.
“The outlook on the system is also in line with the stable outlook for 10 of the 15 banks we rate in the system and reflects stable operating environment and improved prospects for asset quality, among other factors,” Srikanth Vadlamani, Moody’s Vice-President and Senior Credit Officer, said.
The 15 banks rated by Moody’s in India altogether contribute about 70 % of assets.
The report highlighted that profitability remains low, but is improving. Lending margins will be stable because a drop in funding costs following demonetisation will likely offset the pressure from re-pricing of loans to the marginal cost of lending rate.
Banks still face higher credit costs due to tighter provisioning requirements for stressed loans, but these charges will be lower in absolute terms. Smaller treasury gains, however, will weigh on profitability.
In addition, banks will continue to have strong funding and liquidity. Banks have seen a surge of low-cost deposits following demonetisation, which has lowered their funding costs.
Of the 15 banks rated by Moody’s, four are private sector banks with an average baseline credit assessment (BCA) of ba1, while the other 11 are State-owned entities with weaker standalone fundamentals and BCAs of as low as caa1.