Fitch lowers rating outlook of 3 Indian banks

Global agency Fitch on Wednesday cut credit rating outlook to negative from stable of 11 financial entities, including State Bank of India, ICICI Bank, Punjab National Bank and Axis Bank.

The action follows the revision earlier this week of India's outlook to negative.

"The outlook revision of the financial institutions reflects their close linkages with the sovereign by virtue of their high exposure to domestic counterparties and holdings of domestic sovereign debt," Fitch said in a statement.

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The list of downgraded entities include six government banks (including an international banking subsidiary of a government bank), two private banks.

These include Bank of Baroda, Bank of Baroda (New Zealand) Ltd (BOBNZ), Canara Bank, and IDBI Bank.

Besides two wholly owned government institutions -- Export-Import Bank of India and Housing and Urban Development Corporation Ltd have also been similarly downgraded. Besides, the outlook of IDFC Ltd and Indian Railway Finance Corporation Ltd outlook has also become negative.

However, Fitch said the banks continue to have reasonable customer deposit base, domestic franchises and adequate capital.

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The non-banking financial entities, meanwhile, lack the funding advantage, which puts them more at risk during times of increased market volatility, it said.

Fitch also said sovereign support for both the large banks and 'policy-type institutions' is expected to remain strong, with the former benefiting from their large share of system assets and deposits and the latter from their association with the government.

According to analysts, the cut in the rating outlook may raise the cost of overseas borrowings for such institutions.

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Earlier this week, Fitch lowered India's credit rating outlook to negative, citing corruption, inadequate reforms, high inflation and slow growth.

India faces an 'awkward combination' of slow growth and elevated inflation, Fitch had said, adding that the country 'also faces structural challenges surrounding its investment climate in the form of corruption and inadequate economic reforms'.

Standard and Poor's had in April lowered India's rating outlook to negative from stable. It also warned on June 11 that the country may be the first in the BRIC grouping to falter and its sovereign credit rating may slip below investment grade.