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25 May 2006
MOODY'S REPORTS: INDIAN BANKS' STABLE TO POSITIVE OUTLOOK REFLECTS ROBUST CREDIT GROWTH IN A FAVOURABLE ENVIRONMENT AND IMPROVED FINANCIAL METRICS
Limassol, May 25, 2006 -- The stable to positive rating outlook for India's banking system
reflects the country's robust credit growth against a favourable
economic environment, as well as improvements in the banks'
overall financial metrics, says Moody's Investors Service in its
new Banking System Outlook on India. The report also takes into
consideration the challenge presented by the need for ongoing transformation
in the areas of technology and human resources.
The Indian economy continued its growth trajectory with GDP growing at
6.9% during the fiscal year ending March 2005 (FY2005),
one of the highest in the world among non-oil-rich countries.
"This robust macroeconomic environment continued to underpin the
financial performance of Indian banks, which are faced with a broad-based
credit demand, with the industrial sector having picked up and the
corporate sector showing increased credit appetite, together with
robust growth in retail loans and in mortgages in particular,"
says Nondas Nicolaides, a Moody's AVP/Analyst and author of
the new report.
At the same time, Moody's notes the need for ongoing technological
transformation, which remains a challenge for the public sector
banks (PSBs), together with the inflexible and inefficient labour
force that hampers the competitiveness of government-owned banks,
while economic reforms are difficult to achieve and there is a need for
additional infrastructure development.
The surge in retail loans diversifies the banks' loan portfolios,
traditionally dominated by industry credits. However, Moody's
notes that these loans are as yet untested in a negative credit cycle.
"A full credit cycle test of the new loans amid unfavourable economic
conditions could be a decisive ratings driver for Indian banks,"
says the analyst.
There is scope for consolidation in India's crowded banking system,
and consolidation is likely to increase as competition intensifies.
Moody's notes that successful consolidation would result in a more
efficient system less vulnerable to shocks in the economy, with
positive rating implications. Nonethelesss, consolidation
presents challenges with regards to the rationalisation of branches and
Other positive factors cited in the Banking System Outlook include the
strong liquidity across the system on the back of stringent prudential
norms, as well as an improved credit risk profile with a declining
level of non-performing loans (NPLs), together with the PSBs'
robust deposit franchise and implicit government support. In addition,
the RBI has been taking steps to strengthen the regulatory and supervisory
At the same time, the report cites the banks' still relatively
undiversified earnings profile geared towards interest income, as
well as fixed income securities that bring about elevated interest rate
risk, Finally, Moody's notes the need for fresh capital
funds to finance future growth and meet Basel 2 requirements.
* * * * * *
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