Nifty Screen
A screenshot of the Nifty index... India's stocks have had a volatile time, and banking scrips faced the worst of it. The many economic initiatives announced have not soothened sentiments so far. Image Credit: Bloomberg

Mumbai: Moody’s Investors Service slashed the outlook for the Indian banking system to negative from stable, citing disruptions to economic activity from the coronavirus pandemic that will worsen the ongoing slowdown and impair lenders’ asset quality.

A deterioration in global economic conditions and a 21-day lockdown imposed by India will weigh on domestic demand and private investment, the ratings agency said in a statement. This in turn will cause a spike in unemployment and worsen banks’ asset across the corporate, small business and retail segments, pressuring their profitability and capital, it said.

India has announced a raft of monetary easing measures including sharp cuts to policy rates and a $50 billion cash-line to lenders in order to boost credit and ease financial stress in a sector that was battered by a crisis among shadow lenders and witnessed default by a private sector bank even before the viral outbreak hit India.

The nation has the worst bad loan ratio among major economies and last month engineered its biggest-ever bank rescue to maintain confidence in the financial system. The contagion comes at a time when Indian corporates are facing a bond maturity wall and government is trying to avert “waves of defaults”.

While funding and liquidity at state-run banks will be stable, “growing risk aversion in the system following a default” by Yes Bank Ltd. will increase funding and liquidity pressure on small private lenders, Moody’s said.