New Delhi - Soured loans in India's banking system are at a three-year high, global credit rating agency Moody's said Wednesday, as it warned that a muted economic recovery means the sector's outlook could stay bleak.
Worries have been mounting about the threat to Indian banks from delinquent corporate loans in the state-dominated banking system following a sharp economic growth slowdown which the new right-wing government is seeking to reverse.
“High leverage in the corporate sector could prevent any meaningful recovery in (loan) asset quality” even with “a moderate rebound in economic growth”, Moody's said in a report.
The agency retained in the report the negative outlook on the sector it has held since November 2011.
India's economic slowdown has badly hit the corporate sector, with infrastructure and mining projects worst affected as debtors struggle to repay loans in an economy that last year grew by 4.7 percent, the weakest rate in nearly a decade.
Steep interest rates aimed at fighting stubborn inflation and a fall in the rupee have eaten into corporate profits and made it tougher for companies to reduce debts.
Non-performing loans - meaning loans that are in default or close to being in default - are at a three-year high, keeping bank profitability “under pressure as banks continue to provide for problem loans”, Moody's said.
The ratio of non-performing loans to total lending is four percent, according to industry figures.
“Poor (loan) asset quality will require continued provisioning and strengthened capital buffers,” Moody's said, adding the problem was particularly acute for public-sector banks.
Standard and Poor's forecast in a separate report that gross non-performing loans would climb to 4.5 percent by the end of this financial year in March 2015.
India's four-percent non-performing-loan ratio compares with just under one percent in China.
Some banking experts attribute China's healthy bad-debt levels to a tendency by the nation's banks to renegotiate loan terms rather than concede debts have gone bad and write them off. - Sapa-AFP