Outlook remains negative on banks: Moody's

Global ratings agency Moody's outlook on the Indian banking system continues to be negative on the backdrop of slow economic growth, rising inflation, high interest rates and a weak rupee.

The Moody's Investors Service -- which had lowered its outlook on domestic banks to ‘negative’ from ‘stable’ in November 2011 -- on Tuesday said that its view for next 12-18 months remained negative since it expects these factors lead to further deterioration in asset quality and push up provisioning costs, besides a dip in profitability.

Also, second quarter results of banks in the current fiscal showed that asset quality of several state-owned lenders had deteriorated, as slowing economy with high inflation and interest rates made it difficult for many corporate and industrial borrowers to service their loans.

In a statement released on Tuesday, Moody's vice president & senior analyst Vineet Gupta said:  “This environment is characterized 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.”

Moody's point out that the government provides strong support to public sector banks in the form of annual equity infusions, and all banks are mandated to meet loan targets for certain sectors of the economy.

This implies a high degree of involvement by the government in the banking sector and related public accountability.

Also, the ratings agency said loan classification, especially regarding restructured loans, as well as provisioning requirement practices in India is weak.

The government has budgeted Rs 15,000 crore capital infusion in public sector banks for the current financial year.

Unlike last year, when the Centre and Life Insurance Corporation (LIC) infused equity and increase stake, this time the government wants banks to go for rights issue.

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