Moody’s changes the outlook for Indian banks from stable to negative as Covid-19 disrupts the economy

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A masked man walks past parked rickshaws during a 21-day nationwide ban to slow the spread of coronavirus disease (COVID-19) in Kolkata, West Bengal. (Reuters)

A masked man walks past parked rickshaws during a 21-day nationwide ban to slow the spread of coronavirus disease (COVID-19) in Kolkata, West Bengal. (Reuters)

Moody’s indicated that the quality of the assets will deteriorate. A sharp decline in economic activity and an increase in unemployment would lead to a deterioration in household and corporate finances, which in turn would lead to an increase in arrears.

  • PTI
  • Last update: April 2, 2020, 10:41 am IST

New Delhi: Moody’s Investors Service changed the outlook for the Indian banking system from stable to negative on Thursday as the asset quality of banks is expected to deteriorate due to disruptions in economic activity due to the outbreak of the corona virus.

The quality of bank assets will deteriorate in the corporate, small and medium-sized enterprise and retail segments, which will put pressure on profitability and capital.

“We have changed the outlook for the Indian banking system from stable to negative. Disruptions in economic activity due to the outbreak of the corona virus will exacerbate a slowdown in Indian economic growth,” said Moody’s.

Moody’s indicated that the quality of the assets will deteriorate. A sharp decline in economic activity and an increase in unemployment would lead to a deterioration in household and corporate finances, which in turn would lead to an increase in arrears.

“Growing solvency stress among non-bank financial institutions will increase the risk to the quality of bank assets as banks have a high exposure to this sector,” she added.

A deterioration in profitability and credit growth is expected to affect capitalization.

“An increase in loan default fees and a decrease in revenue will affect bank profitability, which will lead to a deterioration in capital resources. If the government, as in previous years, invests more capital in PSBs, it will reduce the capital pressure on banks.” , added it.

While funding and liquidity at public sector banks (PSB) will remain stable, growing risk aversion in the system following a private bank failure (Yes Bank) will increase funding and liquidity pressures on small private sector lenders.

“Disruptions caused by the outbreak of the corona virus will exacerbate India’s economic slowdown. Worsening global economic conditions and a 21-day ban by the Indian government to slow the spread of the corona virus will weigh on domestic demand and private investment,” added Moody’s added.

Moody’s rates 16 commercial banks in India, which together make up around 75 percent of the deposits in the system.

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