Global rating agency Moody's on Monday retained its bleak outlook for the domestic banking industry saying the overall economic conditions are tough and the number of bad debts increasing in the system.
"The fundamental credit outlook for the Indian banking system remains negative, reflecting the currently challenging economic conditions and the rising level of problem loans," Moody's said in a report.
Moody's had changed its outlook for the domestic banking system from 'stable' to 'negative' in January 2009. Moody's main concern is the deteriorating asset quality and the high volume of restructured loans of banks.
During the past fiscal, the absolute level of gross non-performing loans (NPLs) for all commercial banks in the country increased by 22.5 per cent, compared with 11.9 per cent 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," the report said.
The rating agency further said that the negative outlook expresses the rating agency's view on the likely future direction of fundamental credit conditions in the industry over the next 12-18 months.
On a positive note, the agency maintained its positive stance on Indian banks' relatively stable core revenues and sound profitability ratios, which, it said, will act as a moderately positive rating driver.
"Indian banks need to focus on increasing their fee-based income, as this will be the key to improving their quality of earnings and maintaining future profitability... more diversified earnings profiles will act as positive drivers for PSBs' bank financial strength ratings," Nicolaides said.
However, the capital raising ability of state-owned banks, having close to 51 per cent government holding, remains a key-concern, Moody's said.
Indian banks' practices are generally appropriate for the risks they take, given that regulatory limits and the banks' generally conservative risk appetites do not expose them to any high or complex risks, Moody's said.
The agency observed that competition has intensified with growth in private and foreign banking sectors, although they still continue to hold a smaller portion of assets (together 28 per cent) in Indian banking system.
