Moody's lowers outlook of Indian banks; govt, bankers disagree

Rating agency Moody's today downgraded outlook of the Indian banking system to negative --a development that evoked sharp reactions from the government and bankers who described the move as 'unwarranted' as the domestic banks are better than their global counterparts.

Moody's decision, which will make overseas borrowings for Indian banks costlier, triggered intense selling in stock markets. The BSE Banking Index ended 2.62 per cent down. The The BSE benchmark Sensex also tumbled by 1.18 per cent.

Downgrading its outlook, Moody's said slowing economic growth could dent the asset quality and profitability of the Indian banking sector.

"With asset quality, given the tightening environment, we anticipate that it will deteriorate over the next 12-18 months, thereby causing an increase in provisioning needs for the banks in FY'12 and FY'13," Moody's said.

Brushing aside Moody's projection, Financial Services Secretary DK Mittal said, "We are not concerned. We are not affected by the downgrade. Looking at how the global banks are faring, we are much stronger and the ratings have no significance."

Reacting to the Moody's downgrade, Punjab National Bank CMD KR Kamath said, "The Indian banking system does not warrant a downgrade in outlook. There is nothing happening as such to change the outlook."

Critical of the decision of Moody's, State Bank of India (SBI) CMD Pratip Chaudhuri said state of Indian banks is much better as compared to global lenders.

"Perhaps they are stung by experience elsewhere. But otherwise I feel Indian banks are well regulated, we don't deal in exotic products. Also the amount of leveraging is low, we do 12-14 times while the best of European banks leverage up to 20 times," Chaudhuri said.

Earlier in September, another rating agency Standard & Poor's had downgraded country's largest lender SBI's rating to D+ from C- on account of worsening asset quality. This had also evoked sharp criticism from the government.  

Moody's downgrade may have a bearing on overseas borrowing programmes of Indian banks, including the state-owned SBI which had planned to raise about $500 million.

Banking stocks took a beating on the bourses today with SBI declining 6.8 per cent after a rise in non-performing assets in the September quarter.

Other sector stocks like ICICI Bank, HDFC Bank and Axis Bank also fell between 1.4 per cent and 2.5 per cent.

Giving the rationale for its action, Moody's said, "For those banks with weaker capital ratios on average and higher asset quality pressures relative to their individual rating levels, their standalone ratings are likely to come under pressure."

Non-performing assets of state-owned banks have increased to 2.31 per cent of their assets at the end of March 2011, from 2.27 per cent in the year-ago period.

As at the end of September quarter, the gross NPA of country's largest lender SBI stood at 4.19 per cent, higher than 3.38 per cent in the year-ago period.

As regards bank's asset quality, Mittal said, "Our banks are fully capitalised and the government will continue to capitalise it. Our NPAs are better compared to other global banks."

Yesterday RBI Deputy Governor Subir Gokarn had also said that the non-performing assets (NPAs) of banks are not posing any threat to the banking system.