Ratings Firm Moody's downgraded Indian Banking System's Rating outlook from Stable to Negative

Global ratings firm Moody's on 9 November 2011 downgraded the entire Indian banking system's rating outlook from stable to negative indicating a deterioration in asset quality in the months ahead. In September 2011, Standard & Poor's (S&P) downgraded the country's largest lender, the State Bank of India, by one notch.

Arguing its case for the outlook downgrade the Moody's mentioned that with asset quality was anticipated to deteriorate over the next 12-18 months, thereby causing an increase in provisioning needs for the banks in financial year 2012 and 2013.

The Moody's decision was announced at a time when the Eurozone financial system is in turmoil and a large number of European banks are in dire straits.

The government rejected it claiming that 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 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 on 9 November.