Moody’s Investors Service has lowered India’s gross domestic product (GDP) growth projection for the 2019-20 fiscal year to 4.9 per cent from 5.8 per cent, citing weak household consumption.
Private-sector banks have a larger exposure to retail loans and may be more at risk. However, the increase in non-performing loans (NPLs) will likely be gradual.
Moody’s, in a statement, said India's growth had decelerated as an investment-led slowdown had now broadened into weakening consumption. Financial stress among rural households and sluggish job creation are among the key drivers of the slowdown.
A credit crunch among non-bank financial institutions (NBFIs), the major providers of retail loans in recent years, has exacerbated the weaker conditions. Although the income shock to households has unfolded over years, the effects on headline growth were not visible as long as households could borrow. With the materialisation of a credit supply shock, the impact of these twin shocks to growth is apparent.
The rating agency expects a modest cyclical recovery next year; however, growth will be weaker than in the recent past. The slowdown in household demand will have negative credit implications for Indian issuers in a range of sectors.
The government has responded to the slowdown with a series of steps to stimulate domestic demand. It announced income support to farmers and low-income households, and that reduced the corporate tax base rate to 22 per cent from 30 per cent. However, these steps will likely have limited efficacy.
The industry downturn will persist for automobile manufacturers. Weak demand and tight liquidity will constrain earnings for automakers. Although delinquencies in auto asset-backed securities have not increased significantly, the performance of commercial vehicle loans backing ABS deals could deteriorate if subdued economic conditions prolong, it added.