The banking sector indices on the NSE and the BSE were battered on Wednesday after Moody's downgraded the Indian banking sector from stable to negative.

The Bank Nifty shed 2.64 per cent (259.9 points) to close at 9,592.65 while the CNX PSU bank index on the NSE lost 4.25 per cent to close at (141.65 points) to close at 3,200.15.

On the BSE, the Bankex decreased 2.62 per cent (296.97 points) to close at 11,020.96.

Citing an increasingly challenging operating environment, Moody's said that the quality of loans (asset quality), the capital required to grow the business (capitalisation) and returns to investors (profitability) will be adversely affected.

“The results of PSU banks are almost in line with what Moody's has said and this is being factored into the prices,” said Mr Vinod Ohri, Director, Silverdale Capital Services Pte Ltd.

Though there have been widespread concerns over the quality of loans disbursed by public sector banks, experts spoken to reaffirmed their faith in the collection process of PSU banks and RBI's ability to regulate.

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“The banking system in India is far better regulated than many in countries in the western world,” said Mr Arun Kejriwal Founder, KRIS Research.” “If our banking system has been downgraded, it's only a matter of time before we find a larger downgrade in Europe or the US.”

Experts said that banks had moved to a computerised system of identifying bad loans only recently. Hence it was incorrect and inappropriate to downgrade the sector as these bad accounts would either be recovered or written off in the near future.

“The bad loans are a result of high interest rates, increasing inflation, project execution delays faced by companies and policy inertia,” said Dr Nirakar Pradhan, CIO, Future Generali Life Insurance.

“Once the interest rates hikes stop, the situation would improve significantly as RBI has already indicated a pause in its last monetary policy pronouncement.”

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