Moody's Investors Service on Thursday has changed its outlook for the Indian banking system from stable to negative. Moody's estimates that due to the outbreak of the Coronavirus, the asset quality of banks may decline due to disrupted economic activity. Moody's said that the asset quality of banks will be weak in the entire corporate, small and medium enterprises and retail sector along with pressure on portfolio and capital.
Regarding the Indian banking system, Moody's said, 'We have changed our outlook for the Indian banking system from static to negative. Due to the outbreak of Coronavirus, the economic activities will be slowed due to the disruptions of economic activities. Moody's said that the sharp decline in economic activity and increase in unemployment would weaken the financial condition of people and corporates, resulting in an increase in crimes. At the same, the agency said, "Increasing the solvency stress among non-banking financial institutions will increase the risk on asset quality of banks, as banks have a large exposure to the sector." Moody's predicts that capitalization will suffer from loss of profitability and loan growth.
In addition, Moody's said, "Increase in loan loss charges and fall in revenue will hurt the profitability of banks, this will weaken capitalization. If the government invests more capital in public sector banks (PSBs) like in the last few years, it will help reduce capital pressure for them.