‘Banks' profitability will come under pressure'

Even as strong headwinds are unsettling the eurozone monetary system and banks engulfed in the turbulence nearer home are in a tizzy, global ratings agency Moody's appears to have put the Indian banking system under the scanner and decided on a downgrade in view of what lies ahead.

While downgrading the country's entire banking system rating outlook to ‘negative' from ‘stable', Moody's also sought to provide the reasons for its action, as far as individual banks are concerned. “For those banks with weaker capital ratios on average and higher asset quality pressures relative to their individual rating levels, their standalone ratings are likely to come under pressure.''

What appears to have prompted such a step is that the non-performing assets (NPAs) of public sector banks have gone up to 2.31 per cent at the end of March, 2011, from 2.27 per cent in the same period a year ago. More significantly, SBI's gross NPA as at the end of the July-September quarter went up to 4.19 per cent from 3.38 per cent in the same quarter in the previous fiscal

However, even while pointing to the positives in India's banking system, Moody's has sought to forewarn the authorities of the adverse effect of certain external factors. It has noted that the stable customer base of Indian banks and their high level of holding in government securities holdings offer a ‘resilient funding and liquidity profile' that buffers them against destabilising shocks.

At the same time, having averaged 8.4 per cent economic growth over the past five years, sustenance of the growth momentum is under pressure owing to high inflation, monetary tightening and rapidly rising interest rates. “…concerns have emerged over the sustainability of the recovery in the U.S. and Europe and the rise in the borrowing programme of the Indian government, which could drain funds away from the private credit market,” Moody's Vice-President and Senior Analyst Vineet Gupta said.

Moody's pointed out that while loan growth would be a ‘strain' on the banking system in the next 12-18 months, profitability would come under pressure due to lower interest margins and an increase in saving deposit rates. “As monetary conditions tighten and economic activities slow, we expect bank loan growth to fall to 16-18 per cent in 2011-12 and 2012-13 from 21 per cent in 2010-11,” Mr. Gupta said.

Moody's does the rating for 15 commercial banks in India, which together accounted for about 66 per cent of the system's total assets as of March, 2011. The country's banking system is dominated by state-owned banks which account for around 75 per cent of the market in asset terms.

Moody's also pointed to the chances of individual bank ratings coming under pressure. “For those banks with weaker capital ratios on average and higher asset quality pressures relative to their individual rating levels, their standalone ratings are likely to come under pressure,” it said. As of now, however, in sharp contrast to the negative outlook on the banking system, the rating agency has assigned stable outlook assigned to 14 of the 15 rated banks.

In such a scenario, bankers feel that there was no hurry for the downgrading. “Indian banking system is not at risk. The downgrade is not justified at this point of time because it is premature,” HDFC Chairman Deepak Parekh said in Mumbai. Likewise, Punjab National Bank chief K. R. Kamath said: “The Indian banking system does not warrant a downgrade in outlook. There is nothing happening as such to change the outlook.”

As for the bank's asset quality, Financial Services Secretary D. K. Mittal said: “Our banks are fully capitalised and the government will continue to capitalise [them]. Our NPAs are better compared to other global banks…Indian economy is growing at eight per cent, so the stress that Moody's has pointed out, is more outside India than within. We are growing better and our credit growth will also be good.”

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