Moody’s sees no end to banks’ bad loan problem

Mumbai: The asset quality of Indian banks is likely to remain under pressure that will impact their credit profile over the medium term.

Global rating agency Moody’s Investors Service on Monday said it sees subdued prospects for Indian banks with identifying asset deterioration as a key challenge in coming quarters.

“Asset quality will remain a negative driver of the credit profiles of most rated Indian banks and the stock of impaired loans. Non-performing loans (NPLs) and standard restructured loans will still rise during the horizon of our outlook," said Alka Anbarasu, senior analysts and vice-president, Moody’s.  

According to Moody's, such pressure on asset quality largely reflects the system's legacy problems, as the sector had witnessed strong credit growth in 2009-2012 when the investment plans of Indian corporates rose significantly.

While corporate balance sheets would remain weak, the rating agency believes that a further deterioration in key credit metrics such as debt/equity and interest coverage ratios has been arrested.

"We expect the pace of deterioration in asset quality over the next 12-18 months should be lower than what was seen over the last five years, and especially compared to FY2016, even as we consider those remaining problem loans which have not been recognised as such in several large accounts," added Mrs Anbarasu.

The RBI’s asset quality review (AQR) in 2015 was an important catalyst in pushing banks to recognise some large accounts as being impaired. As a result, Moody’s believes that the true level of impaired loans for Indian banks would be around 1 – 1.5 percentage point higher than the latest reported numbers.