Moody’s red flag over banks, deficit

Tags: Banking
A day after Fitch warned India of a sovereign rate cut, another global rating agency, Moody’s, said on Tuesday that the country’s stressed banking system continued to have a negative outlook and that the burgeoning fiscal and current account deficits were a matter of concern.

A statement by Moody’s says its outlook on the Indian banking system for the next 12-18 months remains negative, indicating the challenging nature of its domestic operating environment. The outlook has been negative since November last year.

Economic affairs secretary Arvind Mayaram told reporters after a two-hour-long meeting with Moody’s in the capital that the Indian government was committed to restricting the fiscal deficit to 5.3 per cent of GDP this year. The government had sufficient cash balance to deal with the situation, he said.

The current account deficit which had shot up to 4.2 per cent in 2011-12 is to be brought down to 3.7 per cent this year.

“We discussed inflation, (fiscal) deficit, CAD (current account deficit), the stressed banking system,” Mayaram said. The government did not pitch for a rating upgrade. “Why would we ask anything? We just told them our story, that’s for them to decide,” he said.

“This environment is characterised by slow economic growth, high inflation, high interest rates, and a weak local currency, and we expect these factors to lead to a further deterioration in asset quality, an increase in provisioning costs, and a fall in profitability,” Vineet Gupta, a Moody’s vice-president and senior analyst said in the statement.

“And when we also consider the high level of loan growth which, at about 15 per cent annually, is expected to continue outstripping internal capital generation, then most of Moody’s-rated Indian banks will be challenged to maintain capitalisation at current levels, and some will even need to raise new capital externally,” Gupta said.

Moody’s said the asset quality deterioration would continue in the manufacturing sector. The outlook for an export-led recovery also remained dim, despite the improved currency competitiveness. Weak economic activity, persistently high interest rates resulting from chronic inflation of above eight per cent was challenging borrowers’ debt servicing capacity, it said.

The rating agency identified power distribution companies, independent power producers, telecom companies and airline companies as the major sources for asset stress. With exposures to single/group borrower over 300 per cent of the common equity banks were faced with event risks, the rating agency said.

Non-performing loans were estimated to reach eight per cent, said Moody’s. Its banking system outlook report observed that over the past three years, the restructured assets of Indian banks had steadily increased. A growing proportion of the restructured assets tended to become non-performing loans.

Restructured assets grew by 104 per cent during the 2012 financial year. The government has already apportioned Rs 15,000 crore for public sector bank recapitalisation this year and the allocation to individual banks will be announced later this week. Indian Overseas Bank, Central Bank of India and Bank of Maharashtra topped the list. Dena Bank too figured up in the list.

Fitch too cautioned India of fiscal slippages in the run-up to the 2014 general elections and said declining growth could result in a rating downgrade to below the investment level. India’s growth, which slowed to 5.5 per cent in April-June, slipped further to 5.3 per cent in July-September and the government projections are that the 2012-13 growth could be 5.5-6 per cent. Some economists fear it could slip even below five per cent.

India’s fiscal deficit, for a while under control and close to three per cent of GDP, shot up to nearly seven per cent due to the fiscal stimulus to pump-prime the economy in the wake of the 2008 global financial crisis. It subsequently came down with the phasing out of the stimulus. However, it shot up to 5.8 per cent in 2011-12 due to mounting oil subsidies.

Last month Moody’s said its credit outlook for India was stable but cautioned that the high fiscal deficit and persistent inflationary pressure would continue to pose a challenge.

It had said that its ‘Baa3’ sovereign rating was supported by credit strength, which included a large, diverse economy, strong GDP growth as well as savings and investment rates.

The government’s recent reforms and the currency exchange rate scenario also came up for discussion. “We will stick to the 5.3 per cent fiscal deficit target, no extra borrowing required. The secretary has explained to Moody’s representatives that everything was fairly good,” a finance ministry official said.

The deteriorating asset quality is a matter of concern to bankers too, but banks have managed to maintain healthy capital adequacy ratios and also report reasonable profits. The asset quality is due to the slowing of the economy, but credit growth is picking up gradually and the situation will improve, say bankers.

M Narendran, CMD of Indian Overseas Bank said, “The 18-month period is too long. Indian banks may see their asset improve before that. Already some banks are seeing a peak in non-performing assets which are coming down. If interest rates come down and economic growth improves, companies will be in a better position to repay banks.”

Moody’s expects the high level of loan growth, at about 15 per cent annually, to continue outstripping internal capital generation growth, posing a challenge to Indian banks in maintaining current levels of capitalisation, with some banks needing to raise new capital externally. It was not immediately clear what precisely the agency was referring to as external capital.

It also said loan classification, especially of restructured loans as well as provisioning requirement practices in India were weak. “Loan classification and provisioning requirements mask the extent of banks’ asset quality and capital challenges,” Gupta said.

The banking index was up 0.13 per cent on Tuesday, roughly in line with the broader market.

“Moody’s believes that the government would provide extraordinary support, if needed, in the form of unsecured loans and/ or capital injections to both the public and the rated private banks,” it said.

Despite the deteriorating environment, Moody’s said government support to the banking system was unlikely to be affected. The agency has rated 15 domestic banks of which 11 are in the public sector and the rest are private. The banks rated include SBI and ICICI bank.

krsudhaman@mydigitalfc.com

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