Moodys cut Indian banks outlook over asset quality concern

Global rating agency, Moody’s Investor Service, placed private sector lender IndusInd Bank’s ratings under review for downgrade and cut its outlook on ICICI Bank, Axis Bank and IDBI Bank by a notch due to asset quality concerns. The rating agency had earlier changed the outlook for the Indian banking sector from stable to negative, citing the coronavirus-related impact.

The rapid spread of the coronavirus outbreak, deteriorating economic outlook, falling oil prices have created a severe and extensive credit shock across many sectors, with the Indian financial system in particular been one of the hardest hit due to this shock, especially given the already weakening operating environment.

The downgrade of IndusInd’s ratings reflects the risks associated with the bank's asset quality amidst the deteriorating macro environment and financial market volatility. The proportion of microfinance and vehicle finance for IndusInd Bank is higher than the peers and these loans have a high risk of getting impacted due to the current stress as they have limited capacities to repay. The bank’s funding is also weak as compared to other Indian Banks which is reflected by its high deposit concentration and a low share of retail deposits. This makes the bank vulnerable to the dislocations in the financial market, the bank added in a note.

Meanwhile, the outlook on Axis Bank and ICICI Bank’s ratings has been revised from stable to negative, the outlook for LIC-run IDBI Bank has been made stable from positive earlier. The agency attributed the changes in outlook driven by potential deterioration in asset quality. It further stated that ICICI Bank and Axis Bank may stand to suffer because of their exposures to the small and medium enterprises, given the fact that such businesses have limited liquidity buffers to withstand difficulties.