SBI's credit rating downgrade by Moody's could have far reaching implications on the Indian banking system as bad debts are expected to rise on account of high interest rates, industry chamber Ficci said today.
"Given the situation of alarmingly rising NPA levels, uncertainty over ability to raise capital and infusion of capital by the Government in the face of strained finances, the move could have far reaching implications for the banking sector as a whole," Ficci said.
It said that slowing growth, high inflation and interest rates, squeeze in margins and risks from foreign borrowing have together added pressure on Indian banks.
To contain inflation, the Reserve Bank has hiked policy rates 12 times since March 2010. Corporate India has argued that high cost of borrowing would slow project investment and delay loan repayment.
"For Indian banks the problem is not their high exposure to sovereign debt in the eurozone but home-grown. Indian banks' bad debts are rising as India Inc has started feeling the pinch of high interest rates," Ficci said.
Moody's yesterday downgraded State Bank of India (SBI's) financial strength rating by one notch to 'D+' due to low Tier-I capital ratio and worsening asset quality.
Ficci said the growth in non-performing assets (NPAs) as a percentage of banks' loan portfolio was almost at a five-year high in the first quarter of the fiscal.
"The situation is likely to aggravate as banks may also have to restructure loans that borrowers are finding difficult to service because their businesses have been affected by a slowing economy," it added.
The industry body said that the monetary and fiscal authorities need to work in tandem in addressing the concerns of the banking sector.
"Capital infusion by the exchequer in systemically important banks and shift in focus of the central bank from inflation to growth could be part of such a strategy," it added.
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