Within two days of the downward revision in India’s sovereign credit rating outlook to ‘negative’ from ‘stable’, Fitch, on Wednesday, scaled down the rating outlook of 12 banks and financial institutions (FIs) of the country by the same margin.

As is the standard norm and fall-out of a sovereign rating outlook downgrade, the dozen entities affected by the one-notch lowering in rating outlook by Fitch are six public sector banks (PSBs), two private banks and four FIs. Topping the list of impacted PSBs is the country’s largest lender, State Bank of India (SBI), along with Punjab National Bank (PNB), Canara Bank, Bank of Baroda (BoB) and its overseas subsidiary Bank of Baroda (New Zealand) and IDBI Bank.

While the two private sector banks included in the rating action are ICICI Bank and Axis Bank, among the four FIs are two wholly-owned government institutions — Export-Import Bank of India and Housing Urban Development Corporation (HUDCO) — along with IDFC and Indian Railway Finance Corporation. Explaining the rationale for downgrading the rating outlook of these 12 entities to ‘negative’ in a statement, Fitch said: “The outlook revision of the financial institutions reflects their close linkages with the sovereign by virtue of their high exposure to domestic counterparties and holdings of domestic sovereign debt.”

Even as rating outlook downgrades tend to impact affected entities by way of increased cost of raising funds offshore — the first in the line being SBI which recently unveiled plans to mop up $1-2 billion from markets overseas in the next 3-4 months — the bourses appeared to brush aside the Fitch action as most of the banks listed on the Bombay Stock Exchange ended in the green at the close of the day’s trading.

Not surprising, therefore, that the bankers do not apprehend any impact stemming from the rating action. While SBI Managing Director Diwakar Gupta noted that the downgrade in rating outlook “will not have any significant impact on our overseas borrowing plan”, echoing the same view, Axis Bank President (Treasury and International Banking), P. Mukherjee, also said: “We do not anticipate the present action to have any material impact on the bank.”

In its analysis, Fitch pointed out that while the banks continued to have reasonable customer deposit base, domestic franchises and adequate capital, it was the non-banking financial entities that lacked the funding advantage, which put them more at risk during times of increased market volatility.

The global rating agency also noted that sovereign support for both large banks and ‘policy-type institutions’ was expected to remain strong, with the former benefiting from their large share of system assets and deposits and the latter from their association with the government.

Keywords: Fitchcredit rating

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