Moody’s Upgrades Outlook for Indian Banks from Negative to Stable

Just a couple of weeks after Moody’s upgraded India’s sovereign rating outlook from Negative to Stable, it has repeated the upgrade for Indian banks too. On the strength of improving asset quality and more durable capital buffers,  Moody’s has upgraded the outlook for the Indian banking system from Negative to Stable.

Check - Moody’s Upgrades India’s Rating Outlook to “Stable”

The upgrade is based on a sharp improvement in the health of the Indian banks rated by Moody’s. As per the latest Moody’s presentation, between FY18 and FY21, the stressed loans percentage fell from 10.5% to 7.1%. this is despite the intermittent pressures created by the COVID-19 pandemic and the COVID 2.0 relapse in 2021.

The second key parameter tracked by Moody’s, the Tier-1 capital adequacy ratio, has improved from 9.6% in FY18 to a more robust level of 11.1% in FY21. There has also been substantial recapitalization during this period. At the same time the net interest margin (NIM), the most important banking spread parameter, has improved from 2.7% in FY18 to a more competitive 3.1% in FY21. All these factors combined to justify this outlook upgrade.

One important positive feature pointed out by Moody’s pertaining to Indian banks is the falling cost of credit. The RBI had cut rates aggressively during the pandemic and the abundant liquidity in the system also ensured that transmission rates were very high. This resulted in a sharp fall in credit costs, which is also evident in the fall in interest costs of banks despite the sharp rise in credit during this period.

Moody’s estimates that as the GDP gradually picks up, banking risks should further abate. India’s GDP is expected to pick up by 9.3% in FY22 and by 7.9% in FY23. This is likely to boost credit growth at the rate of 10% and 13% over the next two years. According to Moody’s, most of the legacy problems of the banks are already provisioned and taken care of. In a way, banks are in a position to start off on a clean slate.

Like in the case of sovereign rating, the outlook upgrade adds one more layer of cushion for the stability of banks. It looks like Indian banks have emerged from the COVID crisis, almost unscathed.

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Moody’s Upgrades the Outlook of 9 Banks from Negative to Stable