However, the government says the downgade has no significance

Global ratings firm Moody's on Wednesday downgraded the entire Indian banking system's rating outlook from “stable” to “negative,” citing the likely deterioration in asset quality in the months ahead. Only in September, Standard & Poor's (S&P) downgraded the country's largest lender, the State Bank of India, by one notch.

Understandably, the Moody's decision — at a time when the Eurozone financial system is in turmoil and a large number of European banks are in dire straits — evoked sharp reactions from the government and bankers alike. While the government pooh-poohed the step as of “no significance,” saying the country's lending institutions are much healthier than their global counterparts, Indian bankers termed the move “unwarranted” and “premature” at this point of time.

The market, which is prone to knee-jerk reactions, apprehended that the downgrade by the Moody's would render overseas borrowings costlier for Indian banks. The negative sentiment sparked a major sell-off in banking stocks, resulting in the banking index on the Bombay Stock Exchange tumbling by 2.62 per cent.

“Well-regulated”

Arguing its case for the outlook downgrade in the wake of the economic growth slowdown that could impact the asset quality and profitability of the Indian banking sector, the Moody's said: “with asset quality, given the tightening environment, we anticipate that it will deteriorate over the next 12-18 months, thereby causing an increase in provisioning needs for the banks in FY'12 and FY'13.”

The government sought to brush aside the Moody's prognosis as a non-issue. “We are not concerned. We are not affected by the downgrade. Looking at how the global banks are faring, we are much stronger and the ratings have no significance,” Financial Services Secretary D.K. Mittal said.

Bankers were even more critical, if not sharper. Ostensibly, with the effect of his bank's downgrade by S&P fresh in mind, SBI Chairman Pratip Chaudhuri pointed out that the health of Indian banks was much better compared to their global lenders. “Perhaps they [rating agencies] are stung by experience elsewhere. But otherwise I feel Indian banks are well-regulated. We don't deal in exotic products. Also, the amount of leveraging is low, we do 12-14 times while the best of European banks leverage up to 20 times,” he said.

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