Indian banks are in for lower asset quality and weaker earnings in the next two years.
Global ratings agency Standard & Poor's said the weakening is likely to occur over a period of one to two years, and should put a brake on India’s economic growth.
"We believe the asset quality of Indian banks is likely to deteriorate due to the moderation in economic activity, high inflation, high interest rates, and rupee depreciation," said Standard & Poor's.
The negative outlook on the banks in India (BBB-/Negative/A-3) reflects the negative outlook on the sovereign rating.
The agency noted that small and midsize companies are particularly vulnerable. Stress is also mounting on some highly leveraged large companies.
The report said the slowdown in growth also in China and Brazil could weaken the asset quality and earnings of banks in these countries.
According to an agency report, asset quality in India, China and Brazil is weakening. It said, however, that the credit profiles of banks in these developing countries are unlikely to be affected because of their strong ties with the governments.
It pointed out that state ownership and control of a significant part of the banking industry in BRIC countries is a critical rating factor.
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