S &P Global Ratings on Friday downgraded ratings of Axis Bank and four Indian non-bank financiers, citing worsening operating conditions as a result of the covid-19 pandemic.
Axis Bank’s issuer credit rating was cut one notch to BB+, indicating junk status. S&P said the rating action reflects its expectation that heightened economic risks facing India’s banking system will affect the lender’s asset quality and financial performance.
“While Axis’ asset quality is superior to the Indian banking sector average, its level of non-performing assets (NPAs) will likely remain high compared to international peers. Nevertheless, we expect the bank to maintain its strong market position and adequate capitalization," said S&P.
As on 31 March, 4.86% of the bank’s total loans were non-performing, 14 basis points (bps) below the figure for the December quarter of 2019-20.
The agency said it could further lower the ratings on Axis Bank if its stressed assets rise significantly beyond the system average over the next few quarters. It added that an upward revision will be contingent upon its asset quality turning significantly superior to that of domestic peers and commensurate with international peers over the next 18 months.
The four non-banking financial companies (NBFCs) whose ratings were downgraded are Shriram Transport Finance Co. Ltd. (STFC), Bajaj Finance Ltd., Manappuram Finance Ltd., and Power Finance Corp. Ltd.
“We expect the asset quality of Indian finance companies to deteriorate, credit costs to rise, and profitability to decline over the next 12 months. Given the large acceptance of moratorium by borrowers, funding and liquidity problems could worsen," the S&P note said.
Shriram Transport’s issuer rating was downgraded to BB-; Bajaj Finance was downgraded to BB+; Manappuram Finance to B+ and Power Finance Corp. to BB+.
Credit risks remain very high for finance companies in India, it said, adding that it expects the deterioration in NBFCs’ asset quality to intensify as the economy slows amid the pandemic.
“We expect the microfinance segment to be the most affected by the lockdown and other measures in the fight against covid-19. That is because the microfinance institutions primarily rely on cash collections, and many borrowers with weak credit profiles would have faced disruptions in income generation," the rating agency said.