While more and more public sector banks are exiting Reserve Bank of India's prompt corrective action framework, a slowdown in the Indian economy and a lingering crisis in non-banking financial companies are posing fresh challenged to their asset quality, a Moody's report said Monday.
In the report, Moody's Investors Service Inc. said it expects India's GDP growth to be "weaker" in the next 12-18 months, without quantifying its growth expectations.
The government has projected about 8 percent GDP growth for 2019-20.
"While banks' operating environment will stay stable, the slowdown poses challenges to their asset quality," Alka Anbarasu, a senior credit analyst at Moody's Investors Service, said in the report.
A moderation in GDP growth can lead to creation of fresh non-performing assets in the retail, and small and medium enterprise segments. The slowdown also comes at a time NPAs are reducing in the banking sector—from 12 percent in the recent past to under 10 percent now.
The creation of fresh NPAs will slow down in the NBFC sector as well, due to recovery in the corporate sector and resolution of NPA accounts at India's bankruptcy courts.
The government's bank recapitalisation plan will help public sector banks maintain their capital adequacy ratios, the Moody's report said, adding that some private sector banks are in the process of raising new capital from the markets as their asset growth outstrips internal capital generation.
Systemwide profitability will also improve but stay weak, and funding and liquidity will remain stable, said Anbarasu.
It can be noted that under its baseline scenario, RBI expects gross NPAs in the banking sector to decline to 9 percent by March 2020 from 9.3 percent in March 2019. The central bank is expecting GDP to grow at 7 percent for FY20, up from 6.8 percent in FY19.
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