Moody's maintains negative view on India's credit condition

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Moody's has recently brought out a report and it has maintained a negative fundamental credit outlook for Indian banks although they still remain investment grade.

In an interview with CNBC-TV18, Nondas Nicolaides, VP - Senior Analyst, Moody's Investors Service spoke about the report and the credit outlook on India.

Here is a verbatim transcript of the exclusive interview with Nondas Nicolaides on CNBC-TV18. Also watch the accompanying video.

Q: In the report which you just put out in October after the January report- why have you maintained the negative outlook considering that a lot of Indian macro indicators are improving. What is worrying you?

A: The credit outlook on India has been negative since January 2009. We haven't really changed the outlook with the publication of this banking system outlook report. We just kind of affirmed the negative outlook, which basically describes our expectations for the fundamental credit conditions in the banking system over the next 12-18 months.

Q: Since January when your first report came out a lot has changed, industrial output at that time was about 0.5% or even it was contracting one month. But now you are actually seeing the August numbers at 10.5%. We also have had some amount of foreign capital coming in which has relieved the pain for a lot of Indian companies. Doesn't all this mean lower non performing assets (NPAs) and therefore a better outlook for Indian banks?

A: Yes I mean all these positives while we do recognise them and we do take them into account, but obviously it takes some time, some lag for all these positive developments to feed into the numbers, especially on the asset quality numbers and asset quality indicators of Indian banks.

We feel quite cautious although we are optimistic. The Indian economy seems to be turning. But the credit cycle seems to be turning towards the positive direction. But for the time being we are still maintaining a negative outlook on the fundamental credit conditions in the country.

There is still a big question mark on how all those restructured loans will perform going forward. The trends in terms of the absolute numbers of Non-Performing Loans (NPLs) is still rising. So all these things put together combined with the higher provisioning norms that the RBI seems to be contemplating in introducing, which will have an impact on the bottom line and profitability of Indian banks.

Q: This point you are making about higher provisioning requirements by RBI and that is a factor which will shrink profits. But the higher provisioning itself is something that will strengthen the quality of balance sheet. Why are you counting it as a negative?

A: Well yes, I mean it's a prudent measure. We view it positively, it's an added measure to strengthen the banking system. And obviously a higher provision coverage for those NPLs would be viewed positively from our end.

However, for some banks at least that have a low provision coverage, these would have an impact on their bottomlines and profitability. And obviously profitability is one of the main things that we look at in assigning ratings on banks all over the world, not just in India.

So, obviously the pressure on the profitability side is the big question mark. Now whether this would be significant and if so, how much it would impact the recurring profits of Indian banks is to be seen.