Cash woes at India shadow lenders may lead to more bad debt at banks

Moody’sInvestors Service said funding challenges at India’s non-bank financing companies are increasing the risk of asset quality deterioration at banks, which are already saddled with the world’s worst bad-debt pile.
Risks of loan losses at shadow financiers will weaken their financials, prompting banks to further reduce lending to them and worsening their funding stress, the ratings company said in a report dated Friday. “The consequences will ultimately lead to more nonperforming loans for banks.”

Moody’s statement follow warnings from S&P Global Ratings, which sees risks of contagion rising in the Indian financial sector, and any failure of a large shadow lender could lead to a “solvency shock” to banks. Resolving the cash crunch at non-bank firms is important because they fund everyone from street merchants to business titans in Asia’s third-largest economy, whose growth rate has already slowed to a six-year low.
Banks and non-bank firms are in a feedback loop, especially through exposures to the real estate sector, which is under “significant stress,” Moody’s said. Tighter funding will exacerbate the stress and lead to more soured debt at banks because they have large exposure to non-banks that have actively lent to builders.
“This will hinder improvements in banks’ asset quality, profitability and capital,” Moody’s said. “This is credit negative.”

Slow growth, infra spending in India to keep states' deficit high: Moody's

Rating agency Moody’ssaid on Wednesday that slowing growth and continued infrastructure spending needs would keep deficits at state-level elevated, further challenging India's fiscal consolidation efforts.
The government is facing growing challenges in meeting its medium-term fiscal consolidation goals amid a slowing economy, which has been driven by a combination of both cyclical and structural factors.

Indian sates, which do not generate sufficient own-source revenue for their spending needs and remain dependent on central government grants, have recorded larger deficits in recent years. The implementation of the goods and services tax (GST) further reduced states’ share of own-source revenues, the rating agency said in a statement.
Moody’s on Wednesday released report “Regional & Local Governments - India: Indian states face challenges in reducing deficits, constraining government fiscal consolidation”.
Early this month, Moody’s cut India’s credit ratings outlook to negative on concerns that the economic slowdown would be prolonged and debt would rise. The foreign currency rating was retained at Baa2, the second-lowest investment grade score.
Moody’s projected a budget deficit of 3.7 per cent of gross domestic product (GDP) for the year ending March 2020, a breach of the government’s target of 3.3%. This is an expected outcome of slower growth and a surprise corporate-tax cut.
The state governments remain reliant on central government transfers and the GST has reduced flexibility in their revenue sources. The introduction of the GST replaced many indirect taxes previously levied by the states, reducing the share of own-source revenue in their total revenue. As a result, states now rely on the central government, or the GST Council, for a majority of their revenue, with variations across states.
The GST revenue has been below expectations since its launch, though the central government has agreed to compensate states for any revenue shortfalls due to the GST for five years.
Moody’s said slowing revenue growth and high infrastructure needs would constrain states’ finances. Persistent spending pressures and slower economic growth would result in continued fiscal deficits, it added.
For fiscal 2020, the central government deficit is expected to be about 3.7% of gross domestic product (GDP), slightly wider than the 3.4% posted in fiscal 2019. The fiscal deficit for states would be around 3% for states, taking combined deficit of central and state governments to about 6.7 per cent.
"Recurring state deficits will lead to greater debt accumulation. We expect Indian states’ debt burden to increase to fund significant infrastructure needs. States' gross borrowing needs are budgeted at Rs 7.5 trillion ($104 billion or 3.4% of national GDP) for fiscal 2020, a 28% increase over fiscal 2019 levels," said Moody's.
"State-level deficits will in turn continue to challenge fiscal consolidation at the general government level. States’ revenue outlook remains sensitive to growth in central government transfers and nominal GDP, with variations across states," Moody’s added.

Moody's cuts India's GDP growth to 6.2% for 2019 amid economic slowdown

Amid an economic slowdown, Moody’s Investors Service has cut India’s gross domestic product (GDP) growth rate to 6.2 per cent for calendar year 2019 against its earlier projection of 6.8 per cent.
The rating agency scaled down India’s economic growth to 6.7 per cent for 2020, a cut of another 0.6 percentage points.

If it happens, Chinese economic growth rate would equal India’s this calendar year. However, India would again become the fastest growing large economy, at least in Asia, next financial year as the Chinese GDP growth rate would come down to 5.8 per cent.
India was among eight countries in Asia whose economic growth was slashed by Moody’s. On the other hand, the rating agency retained the growth rate of eight other economies.
The cut in growth rates for India was sharper for both the years than the other seven economies. While it blamed a weaker global economy and an uncertain operating environment for forecasting stunted Asian exports, it attributed slowing growth rates in India, Japan and the Philippines more to the domestic factors.
“While not heavily exposed to external pressures, India’s economy remains sluggish on account of a combination of factors, including weak hiring, financial distress among rural households, and tighter financial conditions due to stress among non-bank financial institutions,” Moody’s said.
If India does grow on the lines of Moody’s projections, it might increasing become difficult for it to become a $5-trillion economy by 2024-25, as expected by Prime Minister Narendra Modi.
For achieving this feat, the economy needs to grow by 8 per cent from the next financial year, according to the Economic Survey. This is based on the assumption that the inflation rate stands at 4 per cent a year. If the inflation rate comes down, the economic growth rate at constant prices needs to grow faster than 8 per cent a year to achieve the prime minister’s dream.
Moody’s said “cooler business sentiment and slow flow of credit to corporate contribute to weaker sentiments in India”.
It said the Reserve Bank of India (RBI) has been most active in cutting rates in support of growth, but lingering financial sector issues may blunt the effectiveness of monetary stimulus. The RBI’s Monetary Policy Committee had cut the repo rate for the fourth consecutive time in its review meeting earlier this month. In fact, the cut was sharper at 35 basis points.
Moody's cuts India's GDP growth to 6.2% for 2019 amid economic slowdown
Moody’s also said generally healthy balance sheets and fiscal positions across the region provide space to pursue countercyclical fiscal policies, but India along with Malaysia, Mongolia, and Sri Lanka did not have that leeway.
It should be noted that India’s economy grew by just 5.8 per cent in the first quarter of 2019, the slowest rate in the past 20 quarters. Economists are divided on whether the growth rate would be lower or higher in the second quarter.
However, most economists believed that the growth would be lower than 5.8 per cent in the second quarter.
The statistics office is scheduled to release the numbers later this month.
Even if the economy grows by 5.8 per cent in the second quarter, the economy still needs to grow by 6.6 per cent in the second half to yield even 6.2 per cent growth rate for 2019, not a simple feat in the current economic conditions.
D K Srivastava, chief policy advisor at EY India, said he pegged the economic growth rate at 5.8 per cent for the second quarter of the current financial year.
“The economy would witness higher growth rate in the second half and my projections are 6.3-6.4 per cent for the entire financial year.” He said the economy may grow close to 7 per cent in the next calendar year, depending on the policy measures by the government.

Yes Bank's profitability to remain under strain for 12-18 months: Moody's

Global rating agency Moody’s today said the profitability of private sector Indian lender Yes Bank will remain under strain for the next 12-18 months as it provides for the stressed loans.
The country’s fourth largest lender booked a net loss of Rs 1,500 crore for the quarter ended March 2019, the first financial loss since its inception in 2004. The loss was driven by higher credit costs incurred non-performing loans (NPLs) and the creation of a contingent provision against a pool of identified stressed assets.

Its provision coverage ratio, at 33 per cent of total stressed loans, is significantly lower than the loss-given default experience of other Indian banks. The coverage includes existing provisions for NPLs, provisions for standard assets and contingent provisions for stressed assets, Moody’s said in a statement.
The bank's overall stressed assets are about eight per cent of its gross loans, taking into account this new disclosure. This includes reported NPLs of 3.2 per cent of gross loans, net standard restructured loans and security receipts of 0.8 per cent of gross loans, and the classified BB-and-below rated exposure of about four per cent of gross loans.
The bank is profitable on a full-year basis. Its return on assets was 0.5 per cent in the fiscal year ended March 2019 (FY19) as against 1.4 per cent in fiscal 2018.
Moody’s said There will be near-term weakness. Yet, the change in corporate behaviour under the new bank leadership will be credit positive after the de-risking is complete.
In late January 2019, the bank appointed Ravneet Gill as its managing director and CEO, after the Reserve Bank of India restricted the bank's founder and long-time managing director and CEO, Rana Kapoor's term until January 2019. Ravneet Gill joined as MD & CEO on March 01, 2019.
In the next three years, the bank will slow loan growth to about 20-25 per cent a year, from an average of 34 per cent between fiscal 2014-19, it added.