Moody’s outlook revision may become expensive for banks

As per three analysts, Moody’s Investors Service’s revision of the outlook for main Indian banks and financial institutions from stable to negative may make them to borrow on international markets in the short term. This may affect their lending rates as well. This could have implications for their lending rates, too.

Moody’s on Friday agreed the ratings, but revised the outlook for six banks and financial institutions—State Bank of India (SBI), HDFC Bank, Hero FinCorp, EXIM India, Housing and Urban Development Corp. (Hudco) and Indian Railway Finance Corp. (IRFC)—following a similar revision in outlook for India’s Baa2 sovereign rating in light of increasing risks that economic growth will remain lower than in the past.

This revision of can affect overseas borrowing programs of the impacted banks, said an analyst with a rating agency in India. He added that it is difficult to assume the actual impact.

“Any rating action will have an impact based on the direction, positive or negative. These are international ratings. Logically, the revision in outlook would have an impact but this depends on whether these institutions are looking at borrowing abroad at this point in time,” said the analyst, requesting anonymity.

Moody’s said it will lower down the ratings of SBI, HDFC Bank, EXIM India, Hudco and IRFC if it downgrades India’s sovereign rating. “The close links between the companies and the government of India is the key reason why Moody’s has changed the outlooks for these companies to negative from stable, after doing the same for the sovereign rating,” said the rating agency statement.

It further added that HDFC Bank’s rating will also get lowered if India’s Baa2 sovereign rating will decrease. As both of them are linked. “Many financial institutions do raise capital from overseas markets and the outlook revision will obviously have a bearing on cost of borrowing per se in the short term. The government has been taking steps to improve the macroeconomic conditions and once those steps start showing results, the rating outlook will also return to stable,” said a partner at a consultancy service, who also requested anonymity.

Third analyst said that it can also have a bearing effect on the borrowing cost, but still would not be that lower as on the ratings.
Moody’s has revised and lowered the outlook of state-run energy companies such as Indian Oil Corp. Ltd, Oil and Natural Gas Corp. Ltd and Oil India Ltd, which could have an adverse effect on their overseas borrowing costs.