Bad debt issues in India likely to be passé shortly

India’s banking system outlook is likely to be stable over the next 12-18 months as the pace of formation of bad loans is expected to decrease compared to last five years, global rating agency Moody’s said on Monday.

Under the asset quality recognition (AQR) of the Reserve Bank, lenders have recognised a major portion of their non-performing assets (NPAs) or bad loans, it said.

“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, especially compared to the fiscal 2015-16, even as we take into account some remaining problem loan under —recognition in a handful of large accounts,” Moody’s vice-president and senior credit officer Srikanth Vadlamani said.

Aside from these legacy issues, the underlying asset trend for Indian banks will be stable because of a generally supportive operating environment, he added.

Moody's said the stable outlook for the banks over the next 12-18 months reflects its assessment that the system is moving past the worst of its asset quality down cycle.

The credit rating firm on Monday released a report — ‘Banking System Outlook — India: Bottoming Asset Cycle, Strong Liquidity Support Stable Outlook’.

The agency rates 15 banks in the country that together account for around 70 per cent of system assets. The ratings outlook on 11 of the banks is positive.

Vadlamani expects net interest margins (NIMs) of banks to stabilise, given the expectation of limited policy rate cuts over the next 12 months, with an upside risk coming from current changes in portfolio mixes in favour of higher yielding retail loans.

“Credit costs will also remain high for the sector, including for some private sector banks, but will be no higher than in recent years for the industry overall.”

Indian banks’ capital strength will continue to show divergence between the weak public banks and the far stronger private lenders, he said.

State-owned banks will require significant external infusions of equity capital over the next three years.

Meanwhile, SBI chairperson Arundhati Bhattacharya said the stressed assets level in the banking sector will come down once the key industrial sectors start functioning at their optimum capacity.

During an interaction, she said that most industrial units are working at 60 to 65 per cent of their capacity against the desired 80 to 85 per cent. “NPAs will start coming down as the demand comes back in the economy and then you see more and more capacity utilisation, which is still sub-optimal,” she said.