Moody’s says India’s sovereign credit profile under threat given its State-run Banks’ huge bad loans

The American rating agency Moody's Investors Service has said that asset quality of state-run banks in India is undergoing a significant and prolonged deterioration, and this can be the main threat to India's sovereign credit profile. It also mentioned high government debt as a drag, but showed a positive outlook on India's Baa3 sovereign rating.

"The main threat to the sovereign credit profile would be via a significant and prolonged worsening in asset quality at state-owned banks, beyond recognition of bad loans currently under way, that causes contingent liabilities to crystallise on the government's balance sheet," said Moody's report on Asia-Pacific sovereigns.

As per the agency, this risk is largely because of high corporate leverage and its spill over to banks. "In India, corporate debt stands at 49.9% of GDP, and has been broadly stable for five years. However, poor profitability and concentration of leverage suggest some risk," the report said.

The report also said something that we all have known, that non-performing loan ratios of public sector banks have increased at an alarming rate in late 2015, following RBI's industry-wide asset quality review.

To sum up, the agency said that, "Significant and extended asset quality or profitability pressures on state-owned banks would hurt the sovereign balance sheet." Not only this, the mounted government debt is also a major risk to India's sovereign credit risk. "Government debt levels are elevated and pose a sovereign credit constraint for India," it said.

However, it also said that high growth can help bring down debt levels.

Image source