Moody's Revises Indian Banking System Outlook To Negative: Here's Why

Moody's predicts deterioration in banks' asset quality due to disruption in economic activity and a decline in asset quality

An Indian stock trader monitors share prices on his terminal. FILE PIC/AFP

New Delhi: Indian banking system has already seen upheavals recently, and Covid 19 outbreak has further proved to be a dent in maintaining a stable outlook. Rating agency Moody’s on Thursday revised its outlook for the Indian banking system to negative from stable, citing an ensuing decline in asset quality and the prevailing Covid 19 outbreak. The agency stated that the asset quality will deteriorate across corporate, small and medium enterprises (SME) and retail segments, leading to pressure on profitability and capital for lenders. While funding and liquidity at public sector banks (PSBs) will remain stable, Moody’s said, the growing risk aversion in the system following the Yes Bank default will increase funding and liquidity pressure on small private sector lenders. The ensuing stress among non-bank financiers will further limit their capacity to lend and denting economic growth which was on a decline prior to the Covid-19 outbreak. “A sharp decline in economic activity and a rise in unemployment will lead to a deterioration of household and corporate finances, which in turn will result in increases in delinquencies," Moody’s said on Thursday. All this will cause rise in provisions and fall in revenues hurting the banks’ profitability, leading to a deterioration of capitalization. It has further said that if the government makes more capital infusions into public sector banks (PSBs), as it has in the past few years, it will mitigate capital pressure for them. However, the government so far has not announced any new plan to provide capital support for PSBs.