Moody's Investors Service on Monday said it has a stable outlook on the Indian banking system for the next 12-18 months as economic growth prospects remain healthy amid weak, but stabilising, asset quality.
The stable outlook is based on six parameters operating environment, asset quality, capital, funding and liquidity, profitability and efficiency, and government support all of which Moody's believe are stable.
The environment will stay stable, supported by robust economic growth, Moody's said in a statement.
The agency expects the real gross domestic product (GDP) in India to grow 7.2 percent in the year ending March 2019 and 7.4 per cent in the following year, driven by investment growth and strong consumption.
"Our outlook for the Indian banking system is stable, underpinned by healthy economic growth, and weak but stabilizing asset quality," Moody's Vice President and Senior Credit Officer Srikanth Vadlamani said.
However, liquidity constraints at non-bank finance institutions (NBFIs) increasingly important providers of credit for the economy will prove a drag on growth. Rising interest rates also represent a risk, Moody's said.
On asset quality, Moody's said it will remain stable but weak, as the clean-up of legacy problem loans nears completion and corporate health improves.
In particular, the banks have recognised the bulk of legacy problem loans and will start making recoveries from large non-performing loans (NPLs) that have been resolved.
This will help shore up asset quality, although the degree of success in the resolution of large NPLs will determine the extent of asset quality improvements, it added.
As for capitalisation, public sector banks will continue to show weak capitalization, and depend on government capital injections to meet minimum capital requirements.
The funding and liquidity profiles of public sector banks, in particular, will remain resilient, despite their solvency challenges. The banks' profitability will improve but stay weak, because of high credit costs, Moody's said, adding Government support for public sector banks will stay strong.
Moody's rates 15 commercial banks in India, which account for about 70 percent of assets in the system.
Of the 15, 11 are state-owned, with weaker standalone fundamentals than private sector banks.