Stress at India lenders may be worse than thought, Moody's says

  • Stress at India lenders may be worse than thought, Moody's says

Stress at India lenders may be worse than thought, Moody's says

"India faces a prolonged period of slower growth relative to the country's potential, rising debt, further weakening of debt affordability and persistent stress in parts of the financial system, all of which the country's policymaking institutions will be challenged to mitigate and contain", it said.

"The pandemic amplifies vulnerabilities in India's credit profile that were present and building prior to the shock, and which motivated the assignment of a negative outlook past year", the agency said.

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It also downgraded India's local-currency senior unsecured rating to Baa3 from Baa2, and its short-term local-currency rating to P-3 from P-2. "Nevertheless, the rating outlook could be changed to stable if India's rating outlook is stabilized", said Moody's.

Following India's sovereign rating downgrade, Moody's Investors Service today took rating action on eleven Indian banks.

Moody's predicted downgrades for more public sector banks (PSBs) as well.

Alongside, Moody's has placed the "Baa3" long-term local and foreign currency deposit ratings of Bank of Baroda, BOI, Canara Bank and UBI and their baseline credit assessment rating of "Ba3" under a review for downgrade. Moody's has affirmed CBI and IOB's ratings and BCA with a stable outlook.

The ratings agency said while the government responded to the growth slowdown prior to the coronavirus outbreak with a series of domestic demand stimulating measures as well as the recent support package for vulnerable households and small businesses, it "does not expect that these measures will durably restore real GDP growth to rates around 8 per cent, which had seemed within reach just a few years ago". Mumbai-headquartered Union Bank of India had assets of Rs.5.3 trillion at 31 December 2019. The deposit ratings of these banks are at the same level as India's Baa3 sovereign rating.

Moody's has also put its rating outlook as negative for IndusInd Bank.

As for HDFC Bank, Moody's has downgraded its BCA to baa3 from baa2 given the strong linkages between the bank and the sovereign, including its large direct exposure to government debt and exposure to common underlying operating conditions, it said. "The long-term local currency bond and bank deposit ceilings were lowered to A2 from A1", the agency added.

In the case of CBI and IOB, Moody's expects the asset quality and profitability pressures due to the coronavirus outbreak will be largely mitigated by the improvements in the banks' credit profile over the past year.