Global ratings firm Moody's Investors Service on Wednesday downgraded its outlook for the Indian banking system to "negative" from "stable" on concerns over asset quality, capitalisation and profitability.
Fitch Ratings, another rater, will release its next 2012 banking system report next month while its current outlook for the sector remains stable.
Moody's said a "negative" outlook is characterised by volatility and uncertain conditions. The outlook applies for the next 12 to 18 months.
Meanwhile, the finance ministry has questioned the Moody's move.
"We are concerned about NPAs, but the situation is not as bad as it has been shown. We are committed to re-capitalise our banks by March 2011," financial services secretary DK Mittal said. He added that bad loans in the agriculture sector will become standard once the crop season starts. On power sector loans, he said that the distribution companies are already revising tariffs and banks have prudentially restructured those accounts proactively where there were concerns.
"We don't read much into Moody's outlook. The market has already factored in a lot of the concerns mentioned by the agency," said Vaibhav Agrawal, a banking analyst with Angel Broking.
Fitch Ratings senior director Ananda Bhoumik told ET, "Our outlook remains stable for the local banking system since 2008. We will release the 2012 outlook in December."
Care Ratings chief economist Madan Sabnavis said, "The banking system has shown resilience and its ex-posure to the sensitive sector is low."
Icra, in which Moody's holds a 29% stake, has expressed concerns over asset quality. "The overall operating environment has weakened. A few sectors are likely to face stresses while a section of SMEs are exposed to international market. So, the slowdown in domestic or global economy is going to impact banks' asset quality," said MD & CEO Naresh Takkar.
Though on the positive side, the global ratings firm has recognised that Indian banks' stable customer deposit base and their high level of government securities holdings.
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