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Moody’s downgrades outlook for Indian banks

Moody's said the asset quality of banks across the corporate, MSME and retail segments would deteriorate, straining profitability and capital

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Moody’s Investors Service on 2 April changed the outlook for the Indian banking system from stable to negative, expecting a deterioration in the asset quality of banks in the country due to the stalling of economic activities by the coronavirus disease (COVID) outbreak and imposition of the lockdown to break the chain of the contagious disease.

Moody’s said that the asset quality of bank accounts in India across the corporate, small and medium enterprises and retail segments would deteriorate, exerting pressure on profitability and capital. “We have changed the outlook for the Indian banking system to negative from stable. Disruptions to economic activity from the coronavirus outbreak will exacerbate a slowdown in India’s economic growth,” Moody’s said.

The rating agency said a fall in the standard of household and corporate finances would be caused by a sharp decline in economic activity and a rise in unemployment. This, it said, would lead to increases in delinquencies.

“Growing solvency stress among non-bank financial institutions will increase risks to banks’ asset quality because banks have large exposures to the sector,” Moody’s said. As profitability reduces and loans grow at a slower pace, capitalisation will be hurt, it said. “Increases in loan loss charges and declines in revenue will hurt banks’ profitability, which will lead to a deterioration of capitalization. If the government makes more capital infusions into PSBs, as it has in the past few years, it will mitigate capital pressure for them,” it added.

On the positive side, funding and liquidity at public sector banks (PSBs) will be stable. However, growing risk aversion after Yes Bank’s default will increase funding and liquidity pressure on small private-sector lenders, Moody’s opined.

It may be recalled that the Indian banking system had received a few jolts during the previous term of the BJP government when corruption in public sector banks led to the case of fraud by diamantaire Nirav Modi in Punjab National Bank. Even the consortium led by the State Bank of India has not been able to recover the loans it gave to Vijay Mallya’s companies.

“Disruptions from the coronavirus outbreak will exacerbate India’s economic slowdown. A deterioration of global economic conditions and a 21-day lockdown imposed by the Indian government in an effort to slow the spread of coronavirus will weigh on domestic demand and private investment,” Moody’s added.

Moody’s rates 16 commercial banks in India. They together account for around 75% of deposits.

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