Moody’s Investors Service trimmed its outlook for Indian banking system on Thursday to negative from stable, citing disruptions in the economic activity caused by the fallout of the coronavirus pandemic.

It said that the quality of banks’ asset will deteriorate across corporate, small and medium enterprises (SME) and retail segments, leading to pressure on profitability and capital.

“We have changed the outlook for the Indian banking system to negative from stable. Disruptions to economic activity from the coronavirus outbreak will exacerbate a slowdown in India’s economic growth,” Moody’s said.

Moody’s said a sharp decline in economic activity and a rise in unemployment will lead to a deterioration of household and corporate finances, which in turn will result in increases in delinquencies.

“Growing solvency stress among non-bank financial institutions will increase risks to banks’ asset quality because banks have large exposures to the sector,” it added.

The global Investors Service expects deteriorating profitability and loan growth to hurt capitalisation.

“Increases in loan loss charges and declines in revenue will hurt banks’ profitability, which will lead to a deterioration of capitalization. If the government makes more capital infusions into PSBs, as it has in the past few years, it will mitigate capital pressure for them,” it added.

Moody’s said while the funding and liquidity at the public sector banks (PSBs) will be stable, the growing risk aversion in the system following the Yes Bank’s default will increase funding and liquidity pressure on small private sector lenders.

“Disruptions from the coronavirus outbreak will exacerbate India’s economic slowdown. A deterioration of global economic conditions and a 21-day lockdown imposed by the Indian government in an effort to slow the spread of coronavirus will weigh on domestic demand and private investment,” Moody’s added.

Moody’s on Friday sharply cut India’s economic growth forecast for 2020 from 5.3 per cent to 2.5 per cent, barely 10 days after the government announced the 21-day complete lockdown.