Kolkata: S&P Global Ratings downgraded Axis Bank and Bajaj Finance to below investment grade due to the higher risks that lenders are facing following the Covid-19 pandemic that put Indian economy in trouble.

S&P also put Indian Bank on ‘credit watch‘, anticipating that the public sector bank’s credit profile may weaken over the coming quarters due to the coronavirus outbreak as well as its merger with Allahabad Bank.

“We lowered our ratings on Axis to reflect our expectation that heightened economic risks facing India’s banking system will affect the bank’s asset quality and financial performance,” S&P said. “While Axis’ asset quality is superior to the Indian banking sector average, its level of non-performing assets will likely remain high compared to international peers.”

It however said that the outlook on Axis Bank remains stable.

It downgraded Axis Bank and Bajaj Fin’s issuer credit ratings to “BB+/stable/B” from “BBB-/negative/A-3” earlier. It also downgraded Axis Bank’s Dubai International Financial Centre branch, GIFT city branch and Hong Kong branches’ ratings to “BB+” from “BBB-”

A rating lower than “BBB-” is known as below investment grade or junk.

The rating company also lowered Shriram Transport Finance’s issuer credit rating to “BB-/watch negative/B” from “BB/negative/B”, and senior secured rating to “BB-/watch negative” from “BB” earlier.

The rating company said economic conditions have turned adverse for Indian banks and drastic efforts to curtail the spread of the virus have resulted in a sharp economic contraction.

“India’s economy is in deep trouble. Difficulties in containing the virus, an anemic policy response, and underlying vulnerabilities, especially across the financial sector, are leading us to expect growth to fall by 5 percent this fiscal year before rebounding in 2021,” it said in another report.

The tough operating conditions would lead to a rise in non-performing loans (NPLs), credit costs, and delays in recoveries for the banking system. “Steps taken by the government and the central bank should provide some respite by delaying recognition of some of the weaker loans, in our view,” S&P said.

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