According to Moody's Investors Service, the Indian financial system is likely to face challenges as a result of the country's stringent green-energy commitments, as more than a quarter of banking sector loans are to so-called polluting industries.
However, the outlook for Indian banks is stable in
the short term, as a likely increase in lending growth
combined with a supportive policy environment should lower 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.
India will become a net-zero carbon emitter by 2070, as per an announcement made by Prime Minister Narendra Modi, at the United Nations Climate Change Conference last month.
In terms of the banking outlook, Moody's stated that a recovery in economic activity would boost credit growth, which would have a positive impact on asset risks. However, asset quality concerns remain due to the stress experienced by small and medium-sized businesses and the retail sector, according to the annual emerging markets banking outlook. Corporate loan quality, on the other hand, is likely to remain stable, with borrowers benefiting from policy support, limiting asset quality deterioration.
The vaccine drive which aided in the recovery of economy was lauded by the rating agency, Moody’s.
For the next 12-18 months, Moody's expects banks in the entire emerging market space to have a stable outlook, backed by continued economic recovery and banks' strong balance sheets, which include high levels of loan loss reserve, high profitability, strong liquidity, and capital position, all of which will help mitigate near-term risks.
Continued government support for public sector banks in India, bolstered by new equity injections in 2022, would be beneficial to loan growth.