Moody's changes credit outlook for Indian banking system to negative from stable

January 30, 2009: Moody's Investors Service has changed the fundamental credit outlook for the Indian banking system to negative from stable, reflecting the deceleration of the Indian economy in the context of the global financial turmoil and an increasingly bleak economic outlook, which, combined with higher loan delinquency rates, indicates a potential weakening in the asset quality of Indian banks.

Moody's negative credit outlook for the Indian banking system expresses the rating agency's view on the likely future direction of fundamental credit conditions in the industry over the next 12 to 18 months. It does not represent a projection of rating upgrades versus downgrades.

The gloomy macro scenario and the change in outlook, and their effects on the ratings of Indian banks, are discussed in greater detail in Moody's new special comment entitled "Stress Testing Indian Banks' Asset Quality", available on

"The global deleveraging process has caused a large capital outflow from India since October 2008 and, as a result, there has been a tightening in the provision of credit to the real economy from banks and higher capital costs for corporates. Moreover, a reversal of the favourable credit cycle in India that has underpinned the robust loan growth of the past few years has gradually been taking place, combined with weakening business and corporate earnings," says Nondas Nicolaides, a Moody's Vice President/Senior Analyst in the Financial Institutions Group.

All of these factors are likely to put a strain on the banking system's asset quality going forward, with higher levels of non-performing loans. Moody's stress testing of the banks' asset quality suggests that their financial profiles are likely to come under pressure, which could trigger negative rating actions.

"Nevertheless, Moody's emphasises that certain rated Indian banks, especially in the private sector, are well capitalised and capable of absorbing the related costs of the negative credit outlook. Private sector banks have been able to raise significant amounts of fresh equity in the past few years by leveraging the favourable capital markets conditions, both locally and internationally. This has allowed them to grow their balance sheets at a faster pace than public sector banks, but has also provided them with the necessary capital to absorb future loan losses in difficult market conditions," adds Mr. Nicolaides.

(This is press release of Moody's Investors Service)

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