The rating action stems from worsening operating conditions that have many investors worried about the health of financials in India.

Shares of Bajaj Finance and Axis Bank were the top laggards on BSE Sensex on Monday, days after rating agency S&P Global downgraded the two finance companies to junk rating. Bajaj Finance’s Issuer Credit rating was downgraded to BB+ with a stable outlook from BBB- and a negative outlook. Private-sector lender Axis Bank’s Issuer Credit Rating was also downgraded to BB+ with a stable outlook owing to the worsening operating conditions. Axis Bank shares were down 4.4% to trade at Rs 406 per share while Bajaj Finance stock price slipped 3.5% to trade at Rs 2,808 apiece.

The rating action stems from worsening operating conditions that have many investors worried about the health of financials in India. “We believe worsening operating conditions following COVID-19 (coronavirus) have increased risks for financial institutions operating in India. We expect a recession to hurt the financial sector,” S&P Global said in a release. With the moratorium in place, where customers have the option to not pay their EMIs without being labeled as a defaulter, the risk of non-performing assets rising runs high for the financial sector. “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 for these companies,” S&P said

Axis Bank which was previously low the lowest investment grade rating now drops into the junk category, however, the lender has clarified that it’s not on CreditWatch. The bank has been downgraded on the back of the growing economic risk that the sector faces. “ 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,” the rating agency said while justifying the downgrading action. Axis Bank could be upgraded in the coming year and half if the lender improves its asset quality to align close to international peers.

Bajaj Finance shares have surged 49% in the last one month. S&P said that the Bajaj Group might not be able to help Bajaj Finance in case of an extraordinary event as all entities are listed, limiting their ability to support. However, stress in the Bajaj Group could spill over to Bajaj Finance, according to S&P Global. “This is due to the benefits to the company’s market position and funding access from the common brand name. Although this is not our base case, we would lower the rating on Bajaj Finance if the group credit profile weakens Substantially,” it said.