Credit rating agency Moody’s Investors Service on Tuesday said the banking system in India is resilient to the financial impacts of the reduction of monetary stimulus by the Janet Yellen-led US Federal Reserve, or the risk of higher interest rates generally.
“The strengths of these banking systems (Indian and Asean) are currently underpinned by their relatively strong capital buffers, modest levels of problem loans, high recurrent profitability and low reliance on foreign funding,” said Eugene Tarzimanov, a Moody’s vice-president and senior credit officer.
“Moreover, the banks will continue to benefit from a supportive economic environment in the region, characterised by growing trade flows between Asia and the recovering economies of the US and Europe,” he said, speaking on the release of a report “ASEAN and Indian Banks Resilient to US Tapering and Higher Interest Rates”, on Tuesday.
“At the same time, these systems could also face pockets of risk, as tapering lifts their economies out of low interest rates and speculative capital inflows into a new credit cycle characterised by slower economic and credit growth, and higher cost of funds,” Tarzimanov said.
The report said interest rates will be likely to rise, and capital flows should continue to reverse as a result of tapering.
Consequently, ASEAN and Indian banks will see higher problem loans on their corporate and retail exposures, especially on foreign currency loans, if their domestic currencies fall substantially. Negative financial market adjustments would also lead to mark-to-market losses on securities investments.
Nevertheless, higher interest rates will support the banks’ net interest margins, which, to some extent, will mitigate their higher credit costs.