Moody's sees credit crunch to prolong in India, pain for households

Ratings company cuts India's outlook to negative, says fewer jobs will be created.

Moody’s Investors Service said it doesn’t expect the credit squeeze among Indian shadow lenders to be resolved quickly, and warned that the squeeze may actually worsen and add to risks in the already flagging economy.

“Stress among non-bank financial institutions with the possibility of a more severe credit crunch that would affect credit supply, both directly and indirectly through linkages with non-banks and banks, adds to the downside risks to the medium-term growth outlook,” the ratings company said in a statement. It cut India’s outlook to negative, the first step toward a downgrade.

Moody’s comments come days after S&P Global Ratings warned that risks of contagion are rising in the Indian financial sector. The credit quality of Indian companies has plummeted to a record low as Prime Minister Narendra Modi’s government struggles to revive economic growth from a six-year-low.

Chart. Source: Bloomberg

With state-run banks still grappling with a pile of bad loans, credit supply is likely to remain impaired for “some time,” Moody’s said. Loan-growth in Asia’s No. 3 economy slumped to 8.8% in October, the lowest level in two years, RBI data show. Bank credit to private, non-financial companies accounts for more than half of India’s gross domestic product, according to data from the Bank for International Settlements.

The spread between the RBI’s key policy rate and the weighted average lending rate on outstanding loans from commercial banks is the highest in data going back to February 2012.

Chart. Source: Bloomberg

Indian households, which already have among the lowest per capita incomes for emerging markets, can’t fully absorb such shocks as fewer jobs will be created, Moody’s said.