India’s growth outlook remained robust in the short-term backed by sustained gradual reforms, but mounting bad loans is a problem area, global credit agency Moody’s said in a latest report.
Moody's has retained India’s sovereign rating at Baa3. A rating evaluates a borrower’s credit worthiness
A higher sovereign rating implies the government has lower likelihood of defaulting on repaying its lenders, and therefore become a better place for investment.
The Indian government has pitched for a sovereign ratings upgrade given the string of reforms in the last few months.
India has enacted a bankruptcy law to help deal with insolvency and a nation-wide Goods and Services Tax (GST) is in the final stages of implementation.
Bad loans, however, continues to remain a challenge.
“As banks continue to recognise bad assets, non-performing loans will rise further, particularly for public sector banks, albeit at a slower pace than at the end of 2015,” Moody’s said in a just-released annual credit analysis of India.
“We estimate that the capital needs are notably larger than the Rs 70,000 crore of equity over the next four years proposed by the government,” it said in the report.
That said, focus on bad asset recognition and the new bankruptcy law could enhance India’s sovereign credit profile, “if it led to improved bank capitalisation levels, renewed loan growth and robust risk processes.”
The banking sector has been beset with bad loans that have risen due to slow growth, delays in project implementation and high wilful default rates.
In the last 12 months, for 39 listed banks, gross non-performing assets (NPAs) rose 96% between—to Rs 6.3 lakh crore in June 2016 from Rs 3.2 lakh crore in June 2015.
The Moody’s report has rated India's credit profile in terms of economic strength as “high”, institutional strength as “moderate”, fiscal strength as “low” and susceptibility to event risk (like bad loans) as “moderate.”
Over the past year, external developments favourable to India such as lower global oil prices have combined with policy measures—including tighter or less accommodative fiscal and monetary policies than in the past – have helped the economy towards a more stable macroeconomic state, the report said.
However, Moody’s expect corporates' profitability to remain muted, which will continue to dampen their ability and willingness to invest in the next few quarters.
It has forecast India’s real GDP to growth at around 7.5% in the next two years, broadly similar to current growth rates.
“Over time, sustained fiscal consolidation, stable inflation at moderate levels and progress on reforms aimed would contribute to sustained growth at robust levels. However, we expect the benefits to be very gradual,” it said in the report.
An uncertain regulatory environment, corruption, a slow-moving judicial system and, in general, inefficiencies in the delivery of government services are India’s key weaknesses.
“In particular, at the current juncture, political fragmentation leads to slow and ad-hoc progress on reforms. Progress on land and labour reforms, when it has occurred has been limited and gradual,” Moody’s said in the report.