Moody's has a word of caution for Indian banks

Moody's Investors Service on Monday said the bank capital will moderately fall in emerging Asia over the next two years, with India seeing larger capital decline without further infusion.

In a report, Moody's said the uncertain trajectory of asset quality is one of the biggest threats for emerging market banks, as operating conditions remain challenging amid the current COVID pandemic.

The 2021 outlook for banks in emerging markets is negative, while the outlook for insurers is stable, it said.

"In the Asia Pacific region, banks' rising nonperforming loans and insurers' volatile investment portfolios are in focus.

“Capital will moderately fall in emerging Asia over the next two years, and banks in India and Sri Lanka will post larger capital declines without public or private injections," Moody's said.

It said non-performing loans (NPLs) will rise most for banks in India and Thailand because of the greater shock to their economies and historically poor performance of certain loan types.

In India, stress among non-bank financial institutions will also curtail their capacity to lend, Moody's noted.

"Profit growth will be modest because of low-interest rate and subdued lending, but lower loan volumes should aid capital," Moody's managing director Celina Vansetti-Hutchins said in the 'Emerging Markets Financial Institutions Outlook' report.

Photograph: Krishnendu Halder/Reuters