Mumbai, 20 July-2014(Indilens Web Team):The government is preparing itself for the draft report for stake…
NEW DELHI: Moody’s Investors Service has cautioned that a prolonged worsening in asset quality at PSU banks is the main threat to India’s sovereign credit profile and made a case for the government bearing some of the cost of cleaning up bank balance sheets.
“The main threat to the sovereign credit profile would be via a significant and prolonged worsening in asset quality at state-owned banks, beyond the recognition of bad loans currently under way, that causes contingent liabilities to crystallise on the government’s balancesheet,” it said.
High corporate leverage poses systemic risks if adverse growth and financial conditions pressure borrowers’ repayment capacity, Moody’s said, adding that the capital infusion by the government in PSU banks is likely to be larger than budgeted.
“When the borrowing is largely from the domestic banking system, governments could bear some of the costs of cleaning up bank balancesheets,” it suggested.
As for the elevated level of government debt, Moody’s in its report on Asia-Pacific sovereigns said it acts as a sovereign credit constraint for India and added that India has little fiscal space to stimulate economy if the growth momentum slows.
The rating agency is of the view that it will take a strong economic growth for the overall debt burden to fall.
Actions by policymakers are likely to enhance India’s medium-term economic strength and, in turn, the sovereign’s financial strength in coming years.
“On the flip side, India’s government has little fiscal space to stimulate the economy if momentum were to slow. In the absence of robust growth, India’s debt could start to climb, and ultimately put pressure on the government’s ability to fund itself,” it said.
In India, it said, although the level of and growth in debt are modest, non-performing corporate assets put pressure on state-owned bank balance sheets.