Capitalisation of state banks will remain weak but centre's support will provide relief, Moody's said.NEW DELHI: The country's real gross domestic product (GDP) for the current financial year and the next fiscal is estimated to grow at 7.2 per cent and 7.4 per cent, respectively, Moody's Investors Service said on Monday.
In its annual Banking System Outlook on India, the global ratings agency stated that the country's GDP will be driven by investment growth and strong consumption.
It also stated that the operating environment will be stable, supported by robust economic growth.
Moody's, however, asserted that liquidity constraints in non-banking financial institutions (NBFIs), increasingly important providers of credit for the economy, will be a drag on the growth.
"Also, rising interest rates are a risk," the report read.The asset quality will remain stable, but weak as clean-up of legacy problem loans nears completion and corporate health improves Moody's added.
"Banks have recognised the bulk of legacy problem loans and will start making recoveries from large resolved non-performing loans (NPLs), which will help shore up asset quality, although the degree of success in resolution of large NPLs will determine the extent of asset quality improvements," the report mentioned.It said that the financial health of corporates will limit new NPL formation while adding that stress among NBFIs is a risk.(: Factory Activity Grows At Best Pace This Year In November, Finds Survey)Capitalisation of public sector banks will remain weak but government support will provide relief, the report said.
"Public sector banks will continue to grapple with weak capitalisation and depend on government capital injections to meet minimum capital requirements," it added.The report also mentioned about Net interest margins (NIMs) while stating that profitability will improve but remain weak due to high credit costs.
"NIMs will widen marginally thanks to a reduction in NPLs and a strengthening of banks' pricing power amid woes surrounding debt capital markets, which make bank loans more attractive for corporate borrowers.
However, credit costs at public sector banks will remain high despite a decline, and this will weigh on system-wide profitability."(: High Oil Prices, Weak Rupee Led To Lower Growth Rate, Says Finance Ministry)Affirming that funding and liquidity will remain strong, the report added, "Banks are largely deposit funded and liquidity coverage ratios (LCR) of all banks are above 100 per cent.
In particular, funding and liquidity profiles of public sector banks will remain resilient, notwithstanding their solvency challenges.""Government support for public sector banks will remain strong.
Capital infusions over the past few years for all public sector banks facing capital shortfalls and other government measures, provide strong support for our assumption of very strong government support for public sector banks," Moody's added.