Moody’s Corporation, the global ratings firm, has downgraded the outlook of the Indian banking system to "negative" from "stable" because of deteriorating asset quality and inadequate capitalisation, specially for the public sector banks.
Moody’s Vice-President and Senior Analyst Vineet Gupta said. that due to deteriorating asset quality, banks will need to increase provisioning significantly in FY2012 and FY2013.
On the positive side, however, the rating firm has recognised that India banks’ stable customer deposit base and their high level of government securities holdings provides them with a "resilient funding and liquidity profile" that buffers them against destabilising shocks.
Loan growth would be a "strain" on the Indian banking system in the next 12-18 months, while profitability will come under pressure due to lower interest margins and an increase in saving deposit rates.
Moody recently downgraded the financial strength rating for India's largest public sector bank, SBI, in October this year to D+ from C-.
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