In addition to easing asset quality concerns since the start of the pandemic, the decline in credit costs as a result of the improvement in asset quality is expected to lead to higher profitability. In addition, capital will remain above pre-pandemic levels, the global rating firm said.
Moody’s expects India’s economy to continue to improve over the next 12-18 months, with GDP growing 9.3% in the fiscal year ending March 2022 and 7.9% next year. “Economic activity will drive faster credit growth, which we expect to be 10%-13% annually,” the Moody’s report said. Weak corporate financials and lack of funding in finance companies are major downside factors for banks. but these risks have been reduced.”
Moody’s rated 11 commercial banks in India, including five public sector banks, which together account for about 71% of the deposits in the system.
The deterioration in asset quality since the start of the pandemic has been more moderate than expected, despite relatively limited regulatory support for borrowers. The quality of corporate loans has improved, indicating that banks have recognized and provisioned all old problem loans in this section.
The quality of retail loans has declined, but to a limited extent, not because of massive job losses. Moody’s said that we expect asset quality to improve further, which will lead to a decline in credit costs, as economic activity normalizes.
Return on assets of banks will increase as credit cost will come down while core profitability of banks will be stable. If interest rates rise, the net interest margin will increase, but it will also result in a mark-to-market loss on banks’ large holdings of government securities.
The capital ratio in rated banks has increased in the last one year as most have issued fresh shares. The ability of public sector banks to raise equity capital from the market is particularly debt positive as it reduces their dependence on the government for capital. However, further increases in capital will be limited as banks will use most of retained earnings to support the acceleration of credit growth, Moody’s said. “We continue to believe that the government will provide a very high level of support for rated public sector banks, given their strong relationship with the government”.