we present here the views expressed by Sampath Kumar, Banking analyst at IIFL who has given vent to his views related to Moody’s downgrade of India and is same is appended verbatim below:
The banking sector has to tread the path cautiously failing which India can be also on the path of Greece and Italy and world will be working out the bail out package. However we need not worry as RBI is doing a stupendous task and we have full faith on the capability of the Governor and directors of RBI who will steer India to success in any scenario.Moody downgrades does not come as a surprise because the issues they have mentioned is well talked about and well documented issues now. I think the issue that will come up basically is how much of this asset quality issues will affect earnings growth as well as capitalization of the banks and what plans particularly the government has in terms of recapitalizing the banks.
We have seen many banks reporting falling NPL coverage ratios and that brings some amount of concern because what it would mean is provisions will eventually flow through the P&L and that will impact earnings growth progressively. Also, we have lower portion coverage that is also going to be an overhang on the extent of capitalization banks have. They might show theoretically Tier 1 capital ratio of 8% plus but if the NPL ratios are high and coverage is low then that’s not going to auger well for them actually. So I would say that not much of the issues flagged by Moody’s reflect this context. I can’t say that they are all entirely discounted simply because asset quality would not trend. We never know the exact depth of the problem. It is always a direction more than the depth that actually we can predict and as a result if there are more negative surprises on asset quality there will be more downsides.
