Global rating agency Moody’s has downgraded ratings for State Bank of India and HDFC Bank’s long-term local and foreign currency deposit from “Baa2” to “Baa3”. This is part of rating action on 11 banks, after Moody’s downgraded India’s sovereign rating from “Baa2” to “Baa3” with a negative outlook.

Rating agency also revised the long-term issuer rating of Export and Import Bank of India (EXIM India) from “Baa2” to “Baa3”. It has maintained negative outlook.

The Indian banking sector has been affected given the disruptions to India’s economic activity from the coronavirus outbreak, which is weakening borrowers’ credit profiles, Moody’s said in a statement.

Disruptions from the coronavirus outbreak will worsen the economic slowdown in India that has been underway in the past year. It will accelerate a deterioration in the banks’ asset quality and profitability. Moody’s has placed the “Baa3” long-term local and foreign currency deposit ratings and Baseline Credit Assessment (BCA) under review for downgrade of Bank of Baroda, Bank of India, Canara Bank and Union Bank of India. All four are large state-owned banks.

It revised private sector lender IndusInd Bank’s long-term local and foreign currency deposit ratings from “Baa3” to “Ba1”. The rating outlook is negative.

Moody's affirmed Punjab National Bank’s long-term local and foreign currency deposit ratings at “Ba1” and its BCA at “b1”. The rating outlook of PNB is changed to from “stable” to “positive”.

And finally, in the case of Central Bank of India and Indian Overseas Bank, Moody’s affirmed their long-term local and foreign currency deposit ratings at “Ba2” and their BCAs at “b2”. The rating outlook of both banks has been maintained as stable.

Moody’s said factors like the rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, and asset price declines are creating a severe and extensive credit shock across sectors, regions and markets.

Referring regulatory and government efforts to face Covid-19 pandemic, Moody’s said stimulus measures announced by the Indian government and the RBI since the start of the outbreak will help mitigate some of the credit pressures.

But the longer and broader the economic slowdown, the more these banks will face asset quality and profitability issues. At the same time, heightened liquidity stress at non-bank financial institutions will pose a risk to the stability of the broad financial system, given banks' large direct exposures to these entities.

The standalone credit profiles or BCAs of most rated public sector banks (PSBs) are expected to deteriorate as the economic shock will strain their already weak solvency. Also, in the absence of external capital support from the Indian government, the capitalization of the PSBs may deteriorate. Despite the near-term asset quality, profitability and capital strain, their funding and liquidity is expected to remain a key credit strength, it added.