NEW DELHI :
Moody’s Investors Service’s revision of the outlook for key Indian banks and financial institutions from stable to negative on Friday could make it dearer for them to borrow on international markets in the short term, three analysts said. This could have implications for their lending rates, too.
Moody’s on Friday affirmed the ratings, but revised the outlook for six banks and financial institutions—State Bank of India (SBI), HDFC Bank, Hero FinCorp, EXIM India, Housing and Urban Development Corp. (Hudco) and Indian Railway Finance Corp. (IRFC)—following a similar revision in outlook for India’s Baa2 sovereign rating in light of increasing risks that economic growth will remain lower than in the past.
The outlook revision could impact overseas borrowing programmes of the affected banks, said an analyst with a rating agency in India, adding that the actual quantum of impact may be hard to predict.
“Any rating action will have an impact based on the direction, positive or negative. These are international ratings. Logically, the revision in outlook would have an impact but this depends on whether these institutions are looking at borrowing abroad at this point in time," said the analyst, requesting anonymity.
Moody’s said it will downgrade the ratings of SBI, HDFC Bank, EXIM India, Hudco and IRFC if it downgrades India’s sovereign rating. “The close links between the companies and the government of India is the key reason why Moody’s has changed the outlooks for these companies to negative from stable, after doing the same for the sovereign rating," said the rating agency statement.
It added that if India’s Baa2 sovereign rating were to be downgraded, HDFC Bank’s rating will also be downgraded in view of the strong linkages between the bank’s business and the sovereign credit profile.“Many financial institutions do raise capital from overseas markets and the outlook revision will obviously have a bearing on cost of borrowing per se in the short term. The government has been taking steps to improve the macroeconomic conditions and once those steps start showing results, the rating outlook will also return to stable," said a partner at a consultancy service, who also requested anonymity.
A third analyst, who also asked not to be named, said the outlook revision can have a bearing on borrowing costs, but not as sharply as a ratings downgrade.
Friday’s sovereign rating outlook revision, which financial institutions are also linked with, reflects lower policy effectiveness in addressing long-standing economic and institutional weaknesses, than Moody’s had previously estimated, the rating agency said.
Moody’s has also revised down the outlook of state-run energy companies such as Indian Oil Corp. Ltd, Oil and Natural Gas Corp. Ltd and Oil India Ltd, which could have an adverse effect on their overseas borrowing costs.
External commercial borrowing (ECB) has been a popular source of capital for Indian businesses. Care Ratings had said on Thursday that there has been a resurgence in ECBs in the past one year, following a decline in the preceding three years, in light of underlying conditions in the domestic economy and financial markets, coupled with the liberalisation of ECB rules.
India has eased ECB rules only when a pressing need is noticed by the government and the Reserve Bank of India, so that cheaper foreign funds do not flood the local economy and create asset bubbles.