Credit outlook for Indian banks negative: Moody's

The fundamental credit outlook for the Indian banking system which was graded as negative after being stable prior to January 2009 continues to be remain so given the currently challenging economic conditions and rise in the level of problem loans according to Moody's Investor Service in its new Banking System Outlook on India. The survey also points to the adverse implications of this for asset quality.

The outlook for the Indian banking system expresses the rating agency's assessment of the general direction of the fundamental conditions in the industry over the next 12 to 18 months and does not represent a projection of rating upgrades vis-à-vis downgrades.

The Indian banking system is largely controlled by the public sector banks (PSBs) with almost 72 per cent of the banking assets with the majority government-owned banks, while the rest are with the private sector (19.6 per cent) and foreign banks (8.5 per cent).

Moody's main concern about the Indian banking system is the deterioration in asset quality and volume of restructured loans and during the year ending March 2009 (FY2009), and the fact tha the absolute level of gross non-performing loans (NPLs) for all Indian commercial banks has jumped by 22.5 per cent, as against 11.9 per cent the year before.

According to Nondas Nicolaides, Moody's lead analyst for the Indian banking system, although NPL expansion must been seen in the context of the problems facing banking globally over the past couple of years, the rapid lending in recent years along with the slowdown in the Indian economy has led to a marked rise in increased delinquency rates, especially for unsecured retail loans.

The future performance of restructured loans would determine the evolution of the NPL trend in the country, adds Nicolaides.