02/11/2015 5:27 PM IST | Updated 15/07/2016 8:25 AM IST

Moody's Upgrades Modi Government's Bank Ratings From 'Negative' To 'Stable'

Michael Gottschalk via Getty Images
New-Delhi, Germany - October 05: Indias Prime Minister Narendra Modi attend Government Consultations of India and Germany on October 05, 2015 in New-Delhi, Germany. (Photo by Michael Gottschalk/Photothek via Getty Images)

Rating agency Moody's Investors Service revised its outlook on India's banking system to "stable" from "negative" on Monday. This comes after a separate report by another of its divisions warned PM Modi that he ought to keep his party members “in check or risk losing domestic and global credibility.”

Moody's had downgraded India's banking system outlook to "negative" in November 2011 but upgraded India's sovereign outlook to "positive" in April, while retaining its rating at "Baa3."

Today's improved ratings came with the caveat that any recovery in asset quality would be gradual given the high debt levels in Indian companies. The World Bank Doing Business Report 2016, that was recently released, also noted a 4 point increase in India's position relative to other countries on the overall climate for business from last year.

Indian banks, particularly state-run banks, have been saddled with bad loans estimated at nearly $50 billion as the economy slowed sharply in the last three years.

But recent earnings reports, including from top private sector lender ICICI Bank, suggested asset quality may be stabilising.

Moody's said it expected India's economy to grow around around 7.5 percent in 2015 and 2016 each, supported by low inflation and gradual implementation of structural reforms.

"The stable outlook on India's banking system over the next 12-18 months reflects our expectation that the banks' gradually improving operating environment will result in a slower pace of additions to problem loans, leading to more stable impaired loan ratios," Moody's said in the statement.

"However, the recovery in asset quality will be U-shaped rather than V-shaped, because corporate balance sheets remain highly leveraged."

Moody's also noted that capital levels remained weak for state-owned banks, with common Tier 1 ratios of only 6 to 10 percent, though lenders retain plentiful of access to funding and liquidity.

(With inputs from Reuters)

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