(Updates with bank index performance in fifth paragraph.)
Nov. 9 (Bloomberg) -- The outlook for India’s banking system was downgraded to negative by Moody’s Investors Service, citing concern that global economic turmoil and a domestic slowdown may trigger more defaults and curb profitability.
“India’s economic momentum is slowing because of high inflation, monetary tightening, and rapidly rising interest rates,” said Vineet Gupta, a senior analyst at Moody’s in Singapore. “At the same time, concerns have emerged over the sustainability of the recovery in the U.S. and Europe, and the rise in the borrowing program of the Indian government, which could drain funds away from the private credit market.”
The Bankex index, the nation’s main gauge of banking stocks, has slipped 18 percent this year as rising interest rates, inflation that remains higher than 9 percent and an economic slowdown stoked concerns that borrowers may default on loans. State Bank of India, the nation’s largest lender, had its financial strength rating downgraded by Moody’s last month due to inadequate capital buffers and rising bad debts.
“This will definitely push up the risk premium that lenders have to shell out when raising funds overseas,” said Dolly Parmar, a banking analyst at Mumbai-based brokerage IFCI Financial Services Ltd. “However, no Indian bank has any immediate big ticket overseas borrowing plans.”
The Bankex index, which tracks 14 stocks in Mumbai, fell 2.6 percent to 11,020.96 at close, the biggest drop in a month.
Indian lenders’ provisions may rise this financial year and the next, as monetary tightening pushes up bad loans, Moody’s said in the statement. The Reserve Bank of India asked lenders on May 3 to set aside more funds to cover bad debt and to double provisions for restructured debt as it sought to curtail risks tied to defaults by borrowers.
“As monetary conditions tighten and economic activities slow, we expect bank loan growth” to decline to a range of 16 percent to 18 percent, from 21 percent, through March 2013, Gupta said.
Outstanding bank loans climbed 19 percent in the 12 months to Oct. 21 from a year earlier, according to data compiled by the central bank. Bank loans grew 21 percent in the last financial year.
India’s central bank raised its key repurchase rate to 8.5 percent from 8.25 percent on Oct. 25. That was the 13th time the Reserve Bank raised rates since the start of 2010 as it sought to curb inflation that was at 9.7 percent in September.
State Bank of India today reported an increase in provisions and defaults by borrowers in the three months to September 30 that overshadowed its better-than-estimated earnings. Bad loans at the bank rose to 4.19 percent of total debt in the quarter from 3.35 percent a year earlier the bank said in a statement to stock exchanges today.
--Editors: Abhay Singh, Arijit Ghosh
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