Crash landing of Economy
When Moody’s Investors Service last week downgraded the outlook for India’s banking system to negative from stable, citing concerns that global economic turmoil and a domestic slowdown may lead to loan defaults and curb profitability, there was a chorus of protests. A negative outlook is characterized by volatility and uncertain conditions. Senior bankers, economists and the government uniformly derided Moody’s action, dubbing it unwarranted and something that defied logic.
There was a collective sigh of relief when the next day another global rater, Standard and Poor’s, lifted the risk profile of the Indian banking industry by one notch, from 6 to 5, saying banking regulations in India are in line with international standards, and the banking regulator, the Reserve Bank of India (RBI), has a moderately successful track record. The agency’s country risk assessment is scored on a scale of 1 to 10, with 1 representing a lowest-risk banking system.
Apart from rising loan defaults, Moody’s is concerned about Indian banks’ ability to raise enough capital to support credit growth, and the rise in the borrowing programme of the Indian government, which could drain funds away from the private credit market. The agency sees downward pressure on the banking industry’s ratings, although it has assigned a stable outlook to 14 of the 15 Indian banks it rates. Collectively, this pack accounts for two-thirds of the industry.
Earlier, in May 2009, in the wake of the global credit crisis following the collapse of US investment bank Lehman Brothers, Moody’s had threatened to downgrade 13 Indian banks on concerns about the government’s ability to support the banking system through capital infusion when the fiscal deficit is high. It did not take action then, but last month it downgraded India’s largest lender, State Bank of India, for its rising bad assets and the lack of enough capital that can curb its ability to lend.
Among other slowdown signs, car loan sales fell for the fourth consecutive month in October, and the 23.77% decline is the sharpest monthly fall in almost 11 years. Indeed, disruptions in production schedules at the country’s largest car maker, Maruti Suzuki India Ltd, contributed to the fall in sales, but high interest rates and rising fuel prices also played a critical role. And if that’s not bad enough, slackening demand in developed markets widened the country’s trade deficit to a four-year high of $19.6 billion in October.
Growth in exports declined to 10.8%, continuing the trend that started in August, even as import growth remained steady at 21.7%.
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