Standard & Poor’s has cut the ratings of four domestic non-banking finance companies (NBFCs). Earlier, the agency had downgraded Axis Bank’s credit rating to below investment grade.

The international credit rating agency announced that it was lowering the ratings of Shriram Transport Finance Company Ltd (STFC), Bajaj Finance, Manappuram Finance and Power Finance Corporation Ltd. It, however, reaffirmed the ratings of Muthoot Finance Ltd and Hero FinCorp.

S&P said worsening operating conditions following Covid-19 have increased the risks for financial institutions operating in India.

“We expect a recession to hurt the financial sector. We expect the asset quality of Indian finance companies to deteriorate, credit costs to rise and profitability to decline over the next 12 months. Given the large acceptance of moratorium by borrowers, funding and liquidity problems could worsen for these companies,” the rating agency observed.

Among these NBFCs, the rating of Bajaj Finance and Power Finance has been cut to BB+ from BBB-. In the case of Manappuram, it has been downgraded to B+ from BB-. For Sriram Transport Finance, the rating was cut to BB- from BB.

According to the rating agency, drastic efforts by the Indian government to curtail the spread of coronavirus have resulted in a sharp economic contraction. S&P added that the government’s stimulus package, with a headline amount of 10 per cent of GDP, has about 1.2 per cent of direct stimulus measures, which is low relative to countries with similar economic impact from the pandemic.

The remaining 8.8 per cent of the package includes liquidity support measures and credit guarantees that will not directly support growth.

“We now forecast a 5 per cent contraction in the economy in fiscal 2021. Credit risks remain very high for finance companies in India. We expect the deterioration in NBFCs’ asset quality to intensify as the economy slows amid the pandemic. We expect microfinance to be the most affected by the lockdown and other measures in the fight against Covid-19,” it noted.

S&P observed that the overall impact on finance companies will be more pronounced than banks since some of these companies lend to weaker customers and have high reliance on wholesale funding.

Earlier, S&P had lowered the ratings of Axis Bank, saying that economic risks have increased for banks operating in India. The rating of the private sector lender was downgraded to BB+ from BBB-.

“We lowered our ratings on Axis to reflect our expectation that heightened economic risks facing India’s banking system will affect the bank’s asset quality and financial performance. While Axis’ asset quality is superior to the Indian banking sector average, its level of non-performing assets (NPAs) will likely remain high compared to international peers,” S&P had said.