Mumbai: Moody's Investors Service has changed its outlook for India's banking system to "negative" from stable citing concerns of increasingly challenging operating environment that is likely to adversely hit asset quality, capitalisation, and profitability.
"A "negative" outlook is one that is characterised by volatility and uncertain conditions," Moody's said in the statement on Wednesday.
"With asset quality, given the tightening environment, we anticipate that it will deteriorate over the next 12-18 months, thereby causing an increase in provisioning needs for the banks in FY2012 and FY2013," Vineet Gupta, Moody's vice-president and senior analyst, was quoted as saying.
The ratings agency said monetary tightening and a slowdown in the economy would cut bank loan growth, while a recent liberalisation of savings deposit rates by the central bank would pressurise lenders' profitability.
"For those banks with weaker capital ratios on average and higher asset quality pressures relative to their individual rating levels, their standalone ratings are likely to come under pressure," the Moody's statement added.
The BSE banking index fell on the news of the downgrade to 11,307.99 at 9:37 am, down 0.1 per cent, against a 0.2 per cent rise in the benchmark index.
Questioning the need for such a rating change, banking veteran Deepak Parekh said he doesn’t see any significant risks for Indian banking system going forward.
"I expect PSU banks to be recapitalized by FY12-end," he told CNBC-TV18.
In October, shares in State Bank of India , the country's largest lender, had fallen to their lowest level in 2 years after Moody's cut its standalone rating to D+ from C-.
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