Fitch Rating Agency Revised Outlook on India's Financial Institutions to Negative

Ratings agency Fitch on 20 June 2012 revised the outlook on India's financial institutions to negative from stable. The outlook of six government banks, two private banks, two wholly owned government institutions and one infrastructure finance company was lowered by the rating agency. The financial entities which faced the axe are as follows: Bank of Baroda (BoB) and its overseas subsidiary Bank of Baroda (New Zealand), Canara Bank, IDBI Bank and Axis Bank, Export-Import Bank of India, Hudco, IDFC and Indian Railway Finance Corporation.

The downward revision in outlook is likely to result in increased cost of fund from overseas. Major public sector lender, State Bank of India which recently announced its plans to raise $2 billion from overseas markets will be hit the most by the revision.

In the report by Fitch, the rating agency listed high customer deposit base, established domestic franchises and adequate capitalisation as the strengths of banks. On the other hand it also mentioned that non-banking institutions are at greater risk because they lack the funding advantage.
 It also mentioned that in case sovereign long-term IDR is downgraded, banks with viability rating (VR) of BBB- would also be affected because of these linkages. VR is designed to represent its view as to the intrinsic creditworthiness of an issuer.

The rating agency had earlier on 18 June 2012 also revised India's sovereign outlook to negative. Following the downward revision of the sovereign outlook, outlook of seven PSUs including NTPC, SAIL, IOC, PFC, GAIL, REC and NHPC was lowered to negative.

The Fitch action thus affected 19 Indian entities in all. The rating agency further opined that weakening economic and fiscal outlook, slowing business reforms as well as inflationary pressures is likely to further put pressure on the future asset quality of the entities.