India Lenders’ Woes May Be Worse Than Thought, Moody’s Says

(Bloomberg) -- Moody's Investors Service said stress among Indian lenders may be “deeper and broader” than it thought, adding more risks to the already battered economy.

“A deeper and more prolonged credit crunch would constrain” gross domestic product growth further, and that “in turn would increase the pressure on financial institutions' balance sheets,” according to the ratings company. It made the comments in a statement Monday, when it cut India's sovereign rating by one step to the lowest investment grade.

The downgrade comes days after India's central bank said it expects the economy will contract for the first time in more than four decades. India already has the world's worst bad loan pile, and Moody's said subdued economic growth is likely to further weaken asset quality and the health of banks and non-bank financial institutions.

Moody's downgraded the long-term ratings on HDFC Bank Ltd. and State Bank of India, among others Tuesday, following the sovereign rating cut. The rater said that worsening liquidity woes at local shadow lenders will pose a risk to financial system stability.

It doesn't expect the credit crunch in the sector to be resolved quickly.

Moody's also kept its negative outlook on the country's sovereign ratings, citing mutually-reinforcing risks from stresses in the economy and the financial system that could lead to a more severe and prolonged erosion in India's fiscal strength. Its global peers -- S&P Global Ratings and Fitch Ratings -- have a stable outlook on the nation's sovereign debt grade.

“The fact that Moody's has maintained its negative outlook even after the downgrade does not bode very well,” said Teresa John, economist at Nirmal Bang Equities Pvt. “While we don't believe a downgrade below investment grade is imminent, a change in outlook by S&P and Fitch will increase the risk materially.”