Moody's retains negative view for Indian banking sector

Moody's outlook for the Indian banking system remains negative, having been changed from stable in January 2009, reflecting the challenging economic conditions and the rising level of bad loans, and the resulting adverse implications for asset quality.

"Our opinion is that the outlook for the Indian banking system is negative, reflecting the challenging economic conditions and the rising level of problem loans. The outlook expresses our expectations for the fundamental credit conditions in the banking system over the next 12 to 18 months," Moody's report said.

However, it doesn't represent a projection of rating upgrades versus downgrades.

The Indian banking system remains largely in the hands of the public sector banks (PSBs), with almost 72% of the banking system assets held by government-owned banks, while the balance is held by private sector (19.6%) and foreign banks (8.5%). However, competition has intensified with growth in the two smaller sectors. Although these entities lack the size to pose a significant franchise threat to PSBs, their greater flexibility and more sophisticated infrastructure allow them to provide superior levels of customer service.

Moody's main concern about the Indian banking system is the deteriorating asset quality and the volume of restructured loans. During FY09), the absolute level of gross non-performing loans (NPLs) for all Indian commercial banks increased by 22.5% (compared with 11.9% the year before).

"Although the NPL expansion must be seen in the context of the problems faced by banks globally over the past couple of years, the rapid expansion of retail lending in recent years, combined with the slowdown of the Indian economy, has led to increased delinquency rates, especially for unsecured retail loans. Concurrently, the future performance of restructured loans will determine the evolution of the NPL trend in India," said Nondas Nicolaides, Moody's lead analyst for the Indian banking system.