Owing to the slow pace of bad loan formation, the Indian banking sector is set to remain stable for the next 12-18 months, Moody's Investors Service said today.
"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," Moody's VP and Senior Credit Officer Srikanth Vadlamani said.
The banking sector of the country is moving past the worst of its asset quality down cycle, resulting in support for its stable outlook for the sector over the next 12-18 months, it said in a report.
"The performance of India's state-owned and private banks continues to diverge," Vadlamani said.
"The state-owned banks will require significant capital over the next three years with limited access to the capital markets, while the private banks benefit from solid capitalisation and good profitability," he said.
Moody's outlook expresses its expectation of how bank creditworthiness will evolve in the system over the next 12-18 months.
The stable outlook is based on Moody's assessment of five drivers -- stable operating environment, asset risk and capital, funding and liquidity, profitability, and government support.
The operating environment for Indian banks is supported by a stabilising economy, it 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.
Asset quality will remain a negative driver of the credit profiles of most rated Indian banks, but the pace of deterioration should slow.
Moody's said it expects limited policy rate cuts over the next 12 months, which should help stabilise Net Interest Margin (NIMs). Credit costs will remain high for the sector, but no higher than in recent years for the industry overall.
It also believes that state-owned banks will receive a very high level of systemic support, irrespective of their size.
(With PTI inputs)