Global ratings firm Moody’s Investors Service on Wednesday downgraded its outlook for the Indian banking system to ‘negative’ from ‘stable,’ raising concerns on a possible rise in bad loans, capitalisation constraints and profitability, though this would not affect the retail consumer.
Reacting to the news, Bankex, or the banking index of the Bombay Stock Exchange (BSE), fell 2.6%, or 297 points, to close at 11,021 on Wednesday.
Moody’s defines “negative” outlook as one characterised by volatility and uncertain conditions while “stable” outlook is one that implies an environment that favours sustainable profitability and limited volatility for a period of at least four to six quarters.
“India’s economic momentum is slowing because of high inflation, monetary tightening, and rapidly rising interest rates,” said Vineet Gupta, vice-president and senior analyst, Moody’s. “At the same time, concerns have emerged over the sustainability of the recovery in the US and Europe, and the rise in the borrowing programme of the Indian government, which could drain funds away from the private credit market.”
The outlook applies for the next 12 to 18 months.The government, however, brushed aside the downgrade and said that domestic lenders are much stronger than their global peers. "We are not affected by the downgrade," said DK Mittal, secretary, department of financial services, finance ministry. "Looking at how global banks are faring, we are much stronger and the ratings have no significance."
“With asset quality, given the tightening environment, we anticipate that it will deteriorate over the next 12-18 months, causing an increase in provisioning needs for the banks in FY2012 and FY2013,” said Gupta.
The Reserve Bank of India has raised interest rates 13 times since March 2010 in a bid to control inflation, making the cost of funds for Indian banks costlier.