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Banking crisis can't be wished away

The outlook upgrade by Moody's is a validation of all that the Narendra Modi government has engineered these past 11 months.

twitter-logo Shweta Punj        Last Updated: April 10, 2015  | 08:41 IST

Shweta Punj, Senior Associate Editor, Business Today
Moody's decision to revise India's rating outlook to 'positive' comes with a strong reminder to fix the mess in the banking sector and implement reforms, even as Fitch keeps India's outlook at 'stable'.

The outlook upgrade by Moody's is a validation of all that the Narendra Modi government has engineered these past 11 months. A booster shot at a time when the prime minister's rankings were falling at home among industry and people at large alike.

"The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially increased. The issuer's institutional strength/framework has materially increased. The issuer's fiscal or financial strength, including its debt profile, has not materially changed," the rating agency said in a statement.

Moody's sovereign rating analyst Atsi Sheth said that India's chances of a sovereign rating upgrade over the next year or so is greater as investments are expected to revive, growth to improve and inflation to stay modest and that the ratings agency would focus on implementation of infrastructure projects, policy support to investments and the banking sector's performance against bad loans for a rating upgrade.

In a nutshell, India seems to be on the right track for now and is expected to outperform its peers in the medium term. But for things to fundamentally change on the ground would require implementation and that's what the rating agencies would be watching out for over a two-year window. Fitch's 'stable' India rating outlook is one notch above negative grade. Standard & Poor's, which had been threatening to downgrade India to junk status, had upgraded India's sovereign rating outlook to stable from negative in September.

There was an overwhelming expectation that the issue of bad loans would be addressed in the budget. But so far the government has been fairly vague on the strategy behind addressing the issue that can potentially derail India's growth - the government had announced a budgetary allocation of Rs 7,940 crore, which is unlikely to meet the capital requirements of state-run banks. The government is also setting up six Debt Recovery Tribunals to speed up recovery of bad loans-a very timid effort, considering the enormity of the issue.

Let's take a look at the numbers. Gross NPAs of public sector banks increased from Rs 71,080 crore in 2011 to Rs 2,16,739 crore as on March 31, 2014. The NPAs of public sector banks rose to 5.33 per cent of total advances in September 2014 from 4.72 per cent in March 2014. According to RBI data as of December 2014, Central Bank of India's 21.5 per cent loans are either bad or have been restructured to save them from turning NPAs, Punjab & Sind Bank has 18.25 per cent of NPAs and restructured loans, and United Bank of India 19.04 per cent. State Bank of Patiala, Indian Overseas Bank, Oriental Bank of Commerce have bad and restructured loans in excess of 15 per cent.

"India's banking system's asset quality, loan loss coverage and capital ratios are relatively weak. This poses sovereign credit risks because of the banking sector's role in financing growth as well the government's deficits through its purchase of government securities, and the contingent liabilities due to the government's ownership of a major portion of the banking sector. In the absence of any improvement in banking-system metrics over the coming months, India's sovereign credit profile will remain constrained," iterates Moody's. Here's hoping that the warning does not go unheard amidst the din of euphoria of supposedly a job done well.

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