Moody’s sees slower pace of new bad loans

India's banking system is moving past the worst of its asset quality slump, according to Moody’s Investors Service which also said while the number of bad quality loans may still increase, the pace will start slowing.

“While the stock of impaired loans may still increase during the horizon of this outlook, the pace of new impaired loan formation should be lower than what it has been over the last few years,” according to a report released by Moody’s Investors Service on Monday.

Key factors

This outlook is based on the company’s analysis of five key factors—operating environment, asset risk and capital (stable), funding and liquidity, profitability and government support.

“The operating environment for Indian banks is supported by a stabilising economy,” the report said. “Moody's baseline scenario assumes headline GDP growth of 7.4 per cent over the next two years compared with 7.3 per cent in 2015, with key drivers being a favourable monsoon season, ongoing public investment, and continued growth in foreign direct investment.”

The asset quality indicator still remains a problem but the picture is getting better on account, according to the report.

Asset Quality

“Asset quality will remain a negative driver of the credit profiles of most rated Indian banks. However, the pace of deterioration in asset quality over the next 12-18 months should be lower than what was seen over the last five years,” the report said.

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