Indian financial system to face challenges due to stiff green energy commitments: Moody’s

But its immediate outlook for Indian banks is stable as a likely pick up in lending growth in a supportive policy environment should drive down credit costs.

“Challenging decarbonization targets set by emerging market sovereigns (China and India) for the next 5 to 10 years will likely add long-term pressure to the financial systems, implying a significant transformation in energy sourcing, production and usage, which are largely financed by the largest nationwide banks,” the global rating company said.

Prime Minister Narendra Modi announced at last month’s United Nations Climate Change Conference that India would become net-zero carbon emitter by 2070. India at present is the world’s third-biggest emitter of polluting gases and solid wastes.

On the banking outlook, Moody’s said that recovery in economic activity would drive credit growth, with positive effects to asset risks. However, asset quality concerns remain because of the stress faced by small & medium enterprises and the retail segment, it said in its annual emerging markets banking outlook. Corporate loan quality, on the other hand, is likely to be stable with policy support for borrowers limiting asset quality deterioration.

“Stable asset quality supported by gradual improvement in the job market and better corporate risk will help reduce credit costs as economic activity normalizes,” it said.

The report lauded India’s rising vaccination rates and selective use of restrictions that helped recovery in economic activity.

Moody’s projected a stable outlook for banks in the entire emerging market space for the next 12-18 months, supported by continued recovery in economic activity, as well as banks’ solid balance sheets, including high levels of loan loss reserve, high profitability, strong liquidity and capital position, which will help mitigate near-term risks.

In India, continued government support for public sector banks would be positive for loan growth, supported by new equity injections in 2022.